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Bernardino: Stress tests reveal important insight into vulnerability

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The first EU stress tests of occupational pensions have provided useful information about their vulnerability to market shocks and the need to better understand the possible secondary impacts on financial stability, even though the exercise did not yield any big surprises, EIOPA chairman Gabriel Bernardino has said.

Setting out the main outcomes of the stress test exercise during a press conference today, Bernardino stressed that it was too early for the supervisory authority to draw “absolute” conclusions about any systemic impact of IORPs’ vulnerability to market shocks or prolonged adverse market conditions, such as persistently low interest rates.

He emphasised that the deficits shown by the stress tests under the different adverse market scenarios – using either a National Balance Sheet (NBS) assessment or the common methodology devised by EIOPA for cross-border comparison – did not represent funding shortfalls, and that there were various means by which economic and/or financial shocks could be absorbed by defined benefit schemes, such as long recovery periods or benefit adjustment mechanisms.

The heterogeneity of the European pensions sector is also a hurdle to making more definitive conclusions, EIOPA said.

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Gabriel Bernardino

It said a harmonised approach to valuing assets and liabilities was central to being able to compare stress test results and assess the impact of shocks on financial stability at the EU level.

This is the common methodology developed by EIOPA, which uses a market risk-free rate for discounting liabilities and is the main reason for the divergence between the deficits calculated under the NBS and common methodology assessments.  

It was based on current national regulations and the holistic balance sheet (HBS), although EIOPA said no decisions had been taken at EU level regarding the use of the HBS, “which is still subject to further EIOPA work”.

Obvious but valuable

Bernardino acknowledged that some aspects of the stress test results “may seem obvious”, but he stressed the importance of having the data to show this.

“That’s the first gain from the exercise,” he said, “both for supervisors and also in the engagement that supervisors will have with the national authorities.

“I wouldn’t say there is something striking, or something that was completely unexpected from the results of the exercise. But, when we look at the numbers and the impacts of the different scenarios, we get much better knowledge and a much better understanding of where the real vulnerabilities are.”

EIOPA carries out stress tests on a two-year cycle, and its next exercise is due to take place in 2017. 

In the interim, EIOPA will analyse the evolution of the market to decide what will be the relevant indicators to stress at that point in time.

EIOPA said more work needed to be done to understand how IORPs’ vulnerability to economic shocks and prolonged adverse market conditions might affect financial markets and the real economy, especially via the mechanism of sponsors coming under pressure to increase future contributions.

It has, however, concluded that the risk of pension funds transmitting financial shocks to other market participants is limited.

The stance was welcomed by The Pensions Regulator in the UK, which noted that high-quality risk management and strong employer covenants were among “flexibilities” that limited the link between pension schemes and financial stability.

Andrew Warwick-Thompson, executive director of regulatory policy at TPR, said: “We are not surprised EIOPA’s pension stress test found only a limited link between pension schemes and financial stability.

“In our view, the results of the EIOPA pensions stress test illustrate the flexibilities under which UK pension schemes can operate.”

Neither was the Dutch Pensions Federation surprised by the outcome of the stress tests, “as they had been conducted while pension funds’ balance sheets were already stressed”.

It attributed EIOPA’s conclusion, that Dutch pension funds posed a limited risk to financial markets, to the long-term character of schemes’ liabilities and recovery plans.

“As a consequence, Dutch pension funds have a stabilising effect on financial markets,” it said.

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