The European Insurance and Occupational Pension Authority (EIOPA) has called for “further supervisory response” to the “vulnerabilities” identified in its stress test of European pension funds.

In its financial stability report for the first half of the year, the supervisory authority warns that the macro-economic and financial environment remains “extremely challenging” for insurers and occupational pension funds, and concedes that yields are likely to remain low for a prolonged period of time.

It also acknowledges that a “double-hit” scenario – involving a drop in the risk-free rate used to calculate liabilities combined with higher risk premia – cannot be ruled out.

EIOPA says it will factor in the problem of low yields and the double-hit scenario as part of its stress test of the European insurance sector later this year.

With respect to Institutions for Occupational Retirement Provision (IORPs), the “vulnerabilities” identified in the 2015 stress test of the occupational pension sector “need further supervisory response”.

Gabriel Bernardino, chairman at EIOPA, said: “Insurers and IORPs need to use robust risk-management practices to manage the ongoing macroeconomic challenges.

“With Solvency II, the risk culture in the insurance sector is significantly reinforced. In the IORPs sector, prudential regimes are not sufficiently risk-sensitive and thus might underestimate the risks.”

In April, EIOPA argued that occupational pension funds should be required to carry out risk assessments based on a standardised framework, and Bernardino referred back to this opinion in his comment on the financial and macro-economic risks facing IORPs.

EIOPA’s report also highlights the funding situation in the occupational pension sector, noting that, based on preliminary data, “cover ratios seem to have dropped” among those countries reporting data for last year.

This, it says, creates additional pressure for the sector.

Complaints or warnings about the impact of the low-yield environment and the European Central Bank’s (ECB) quantitative-easing policy have become a fairly regular feature among pension funds in recent times, including references to funded pension systems as “collateral damage” or to ECB policy as “a train-wreck in slow motion”

In today’s financial stability report, EIOPA points out that its 2015 stress test exercise for IORPs “underscored that current heterogeneous national prudential regimes are often not entirely sensitive to market price changes,” and warns this could lead to the underestimation of risk.

It says it also makes it harder to gauge consistently the impact on pension schemes across countries.

According to EIOPA, its risk assessment has largely identified the same key concerns as those held by national supervisors – the key risks and challenges for the insurance and pension sectors “remain broadly unchanged”.

It sees, however, a shift away from investment in fixed income toward other asset classes, which “might evolve over time as a response to the low-yield environment”.

This has the potential to constitute “excessive ‘search for yield’ behaviour”, which national supervisory authorities must watch closely “to ensure all risks are properly managed”.

It says this applies in particular to life insurers.

However, it also notes that, among IORPs, the UK sector continues to shift toward fixed income, although at a slower pace than in recent years.

“A few other countries also reported increased investment allocation to equities due to the low interest rates,”  EIOPA says.

“The monitoring of this trend is recommended, as, in case it persists, it has increased exposure of the [occupational pension fund] sector to market risk.”

According to EIOPA figures, the average rate of return on assets for IORPs dropped from 8% in 2014 to 3% in 2015, attributable to the “low performance of the equity and fixed income markets during the second half of 2015”.

“The current low-yield environment,” it adds, “also puts additional pressure on the overall performance of occupational pension funds.”