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Dutch pensions industry challenges EIOPA approach to stress tests

The Dutch pensions industry has criticised recent European stress tests, arguing that the approach taken by the European Insurance and Occupational Pensions Authority (EIOPA) will fail to provide any useful insights.

APG, the largest pension fund in the Netherlands, recommended using asset liability management (ALM) studies in place of economic scenarios to assess the viability of the pensions sector, an idea backed by pension managers PGGM, MN, Syntrus Achmea and the Dutch Pensions Federation.

In a joint article for the current issue of IPE magazine, Peter Vlaar, APG’s head of ALM modelling; Wilfried Mulder, senior policy adviser at APG; Siert Vos, MN’s senior policy adviser; Agnes Joseph of Syntrus Achemea; Niels Kortleve, PGGM’s innovation manager; and Sibylle Reichert of the Pensions Federation, said EIOPA should not treat pension funds like banks or insurance companies.

The authors – pointing out that pension funds cannot default and are unleveraged and unburdened by mass withdrawals – denied that the sector posed a contagion risk to other institutions.

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“On the contrary,” they said, “Dutch IORPs absorb financial shocks without amplifying or transmitting these to other institutions, and thus they have a stabilising effect in financial markets, especially in times of financial market distress.”

They added that any distress caused by a financial downturn where risks are associated with a pension fund, such as benefit certainty, is not instantaneous but rather evolves slowly.

“This is due to the long-term nature of the liabilities of Dutch IORPs and, in the case of defined benefit (DB) schemes, also due to the associated recovery plans,” they said. 

“In this case, the financial distress of a typical Dutch IORP is not transmitted to the financial system and therefore does not lead to instability of financial markets.”

Instead of EIOPA’s assessing European pension funds based on the two adverse market scenarios – proposing a crash in share prices or a rate increase – or an increase in life expectancy, the authors instead proposed ALM studies as a means of providing insight into the impact of stress scenarios on beneficiaries.

They argued that the ALM study included a number of calculations, such as future potential benefit levels, that were absent in EIOPA’s calculation.

“Moreover,” they added, “contrary to the DB stress test approach, it provides metrics – such as expected impact and impact in a ‘bad weather’ scenario over multiple time horizons – that provide insights into the consequences of a shock.”

The results from the stress tests, conducted between May and August last year, are expected to be published by the second quarter of 2016.

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