The European Insurance and Occupational Pensions Authority (EIOPA) has launched its second stress test of EU occupational pension funds, geared towards analysing how pension funds could pass on shocks to the real economy and financial markets.

The first stress test – which came in for strong criticism from the European pensions industry – was carried out in 2015, with the results published in early 2016.

It found that pension funds had a limited ability to pass on financial shocks to other market participants, but EIOPA said further work was needed to understand the potential consequences on the real economy and financial stability in general. This is the focus of this year’s stress test.

Gabriel Bernardino, chairman of EIOPA, said: “EIOPA’s second occupational pensions stress test analyses the effects of prolonged adverse market conditions on sponsoring companies, members and beneficiaries, and financial markets through pension funds’ investment behaviour, elaborating on the second-round effects on the real economy and financial stability.

“It will provide up-to-date information on the vulnerabilities of the occupational pensions sector and the possible repercussions for the stability of the wider financial system and European economy.”

However, aba, the German occupational pensions trade body, has rejected EIOPA’s approach to the 2017 stress test exercise on several grounds.

Georg Thurnes, chief actuary for Germany at Aon Hewitt and deputy chief executive of aba, said that pension fund sponsoring companies do not come under EIOPA’s remit and that it was “unacceptable” for the stress test to incorporate an analysis of how they would be affected.

In many cases the information being sought by EIOPA about sponsoring companies was either not publicly available or was not made available to the IORPs, he said.

Thurnes also argued that EIOPA did not have the necessary expertise to conduct a reputable study on the financial strength of sponsoring companies in different sectors.

The stress test covers IORPs providing defined benefit (DB), hybrid, and defined contribution (DC) plans.

The 2017 exercise will examine how Institutions for Occupational Retirement Provision (IORPs) would cope in a “double-hit scenario”, consisting of a drop in risk-free interest rates and a fall in the price of assets held by the pension funds.

The stress scenario was developed in cooperation with the European Systemic Risk Board.

The DB/hybrid part of the exercise will analyse how the impact of these theoretical shocks on pensions funds would affect sponsor support and pension benefits over time, while the DC part will assess the impact on IORPs’ assets and on the retirement income of three representative plan members. This will be extrapolated to all DC plan members.

The exercise also seeks to understand what IORPs’ investment behaviour would be like following the stress scenario.

DB and hybrid schemes will have to apply the double-hit stresses to the “national balance sheet” – incorporating national-level rules and assumptions – and the “common, market-consistent balance sheet”. The latter corresponds to the common framework balance sheet that EIOPA has proposed, which aba and other industry associations oppose.

EIOPA said using the common balance sheet was necessary to ensure comparability of the stress test results.

A new aspect of the 2017 stress test is that DC pension funds have to assess the impact of the adverse market scenario on the market value of assets.

EIOPA’s aim is to cover all the European Economic Area (EEA) countries with a material IORP sector. It said 20 countries from the EEA were set to participate in the stress test. The deadline for participating IORPs to complete the exercise is 13 July.