The new stress test launched last week by the European Insurance and Occupational Pensions Authority (EIOPA) will result in pension risks in the UK of “multiple times the current deficits”, according to consultancy LCP.
The stress tests seek to gauge the resilience of market participants to challenging market scenarios and to rising life expectancy.
The stressed scenario is based on a large fall in assets, with stock markets falling 45%, and life expectancy increasing by around two years at the same time.
Using its own data collected from company reports and accounts compliant with IAS 19, LCP has carried out an approximate impact study to work out projected deficits for a number of UK pension funds for the scenarios drawn up by EIOPA.
Alex Waite, a partner at LCP, said: “The situation being considered in the stressed scenario is deliberately extreme. It will show UK pension schemes to be exposed to considerable risk – we expect the calculations will show risk amounting to multiple times current deficits shown in company accounts.”
However, he added that the precise multiples to be expected could not be specified at this stage because the publicly available data used by LCP for the calculations was too general.
Waite said: “To get a more detailed result, we would have to use more granular information from individual pension funds and take into account their individual circumstances.
“For example, some schemes might have hedged their risk, or settled it by buying a policy from an insurer. That might help lower the overall level of risk in the UK pensions sector.”
He added: “It’s important these stress tests show a reasonable number for the level of pensions risk because that information will be used for decision-making in future.
“In particular, if risk levels are overstated, this might result in unwelcome and unnecessary regulatory responses from EIOPA.
“A similar position exists for accounting for pensions standards issued by the International Accounting Board, which require disclosure that bear little relation to the reality, but decisions still get made on the back of those figures.”
But Waite said: “We think the stress test is a sledgehammer to crack a nut. But while it is complex, for some companies and pension schemes it will provide some useful results to help understand the risks involved.”
EIOPA is hoping that at least half of pension schemes, by asset value, in each EU country will participate in the stress test exercise, which is being co-ordinated by local pensions regulators in each country.
The deadline for responses is 10 August.
Waite said: “Trustee boards might want to discuss these calculations with company sponsors because, the more trustee boards who carry them out, the greater the influence they will have on EU policy.”