The EU pension fund regulator has launched its 2022 stress test for the occupational pensions sector, featuring a climate risk stress test and an assessment of the effects of a rise in inflation.

The climate stress test, the first for the EU occupational pension fund sector, tests IORPs’ resilience against a climate change scenario developed together with the European Systemic Risk Board and the European Central Bank.

Developed by the Network for Greening the Financial System, the scenario reflects a sudden, disorderly transition to climate neutrality due to delayed policy action. Specifically, the scenario assumes that new climate policies are not introduced until 2030.

In the scenario, this delay leads to an abrupt carbon price increase, which triggers the materialisation of a high transition risk affecting the entire economy.

EIOPA said the stress test focuses on the impact on pension funds’ investments, but also addresses the effects on IORPs’ financial situation, including the financing by sponsor undertakings.

As a result, the supervisor said, the climate change scenario will be applied to the balance sheet, both national valuations and the common balance sheet.

The second objective of the 2022 stress test is to assess the effects of a rise in inflation on retirement income. This will be done by carrying out a qualitative analysis to assess the dependencies between inflation, loss of purchasing power, and mandatory or automatic (or discretionary) mitigating adaptation mechanisms.

Both the climate and inflation-related analyses are to be complemented by two specific questionnaires, one to request information following up on the ESG analysis of the 2019 IORP stress test, and the other on inflation-related matters. to allow an analysis to identify and understand the potential effects of inflation on members’ and beneficiaries’ retirement income.

According to EIOPA, the latter will focus on the extent to which scheme characteristics and national frameworks provide for mitigating measures or adaptations to protect against inflation.

Participating IORPs are expected to complete the stress test exercise and submit the results to their national competent authorities by 13 June. EIOPA is planning to publish the results in December.

Finalisation of the stress test comes after EIOPA obtained feedback on the draft technical specifications from stakeholders, including its Occupational Pensions Stakeholder Group.

It does not appear to have changed course on its position to disclose names of the pension funds participating in the stress test, contrary to PensionsEurope requests stemming from concerns from some German corporate defined benefit IORPs.

EIOPA’s last IORP stress test, carried out in 2019, shortly before the onset of COVID-19, found that an adverse scenario – characterised by sharply widening credit spreads and “a sudden reassessment of risk premia” – could lead to shortfalls of between €180bn and €216bn, depending on the methodology.

For the first time, the stress test exercise was complemented by an analysis of ESG factors for pension funds.

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