National regulators welcome stress test findings, others see HBS risk

Dutch and UK pension regulators have welcomed EIOPA’s findings that occupational pension schemes in their countries do not pose a systemic risk, while other EU industry participants have responded to the stress tests by focusing on the perceived threat of the holistic balance sheet (HBS).

Regulators in the UK and the Netherlands, two of the biggest contributors to the sample of defined benefit (DB) schemes EIOPA tested, welcomed the regulator’s conclusion that the pension sector had a limited ability to pass on financial shocks.

EIOPA chairman Gabriel Bernardino said further work needed to be done to assess the potential consequences on the real economy of increased pressures on sponsors.

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

UK pension schemes have several “flexibilities” that allow them to respond to adverse market conditions in a variety of ways that suit their individual circumstances, he added.  

TPR noted that it had a DB code of practice that gave guidance to trustees on how to manage their schemes’ funding, and encouraged the use of a variety of qualitative and quantitative approaches to risk management, including scenario testing.

The UK accounted for nearly 40% of the sample of defined benefit schemes EIOPA tested.

Out of 140 Europe-wide participants, 61 were UK defined benefit schemes.

The Netherlands was another large contributor, accounting for 44% of the DB sample.

The Dutch Pensions Federation, meanwhile, said it was not 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,” the Federation said.

It further noted that Dutch schemes were permanently monitoring vulnerabilities and systemic risks through asset-liability management studies (ALM).

However, in the Federation’s opinion, the stress tests have not generated a proper view on the risks for defined contribution (DC) plans.

“The tests in particular provide information about the financial position directly after a crisis but hardly about the impact on the ultimate pensions income,” the industry group said.

The Dutch supervisor De Nederlandsche Bank concluded that, from a European perspective, Dutch schemes have a high-risk profile. 

However, it also noted that the stress tests had made clear the Dutch pensions sector posed no systemic risk.

Dutch pension funds that have participated in the tests represent more than 50% of all Dutch pension assets.

According to DNB, Dutch pension funds would in particular be hit in a scenario of declining security markets, falling interest rates and increasing spreads.

Pension funds would also suffer in a scenario where security markets were hit less hard but interest rates fell further, even slightly. 

DNB said the impact of both scenarios was down to the relatively large equity portfolios of Dutch pension funds, as well as the fact they have hedged only a part of their interest risks.

The impact of the longevity scenario, which assessed the impact of a 20% longevity increase, was less severe, according to the Dutch supervisor.

The spectre of HBS

Other EU pensions industry participants have cautioned against reading too much into the stress test results and raised the matter of the HBS, the idea of an accounting tool that can accommodate the national specificities of different pension regimes.

The HBS informed the common methodology EIOPA developed to be able to make cross-border comparisons of the stress test results, but the HBS otherwise hardly comes up for mention in EIOPA’s documents on the stress tests and was not a topic of discussion during the press conference.

PensionsEurope, however, raised the topic of the HBS in a reaction to the stress tests.

Overall, it urged caution in interpreting the results, saying it only covers a small portion of the total number of IORPs.

“PensionsEurope concludes that the results do not necessarily give the correct picture of the European IORPs’ ability to cope with stress scenarios,” it said.

Janwillem Bouma, chair at PensionsEurope, brought up the issue of the HBS, saying he has “serious doubts” about it or other common European methodologies used by EIOPA.

“The results based on existing prudential frameworks in each member state are in many ways different than those based on the European methodology, and I am not convinced a European framework as envisaged by EIOPA is suitable or useful,” he said.

Francois Barker, head of pensions at the UK law firm Eversheds, warned that the “threat” posed by the HBS remained, and that the stress test results could revive the debate around its use.

Barker noted that EIOPA was due to report on the need for a solvency-based regime for pension funds, the results of which stem from a quantitative assessment launched at the same time as the stress tests.

“EIOPA could recommend a new reporting requirement be introduced for European defined benefit plans to require them to report their funding position on the holistic balance sheet basis to national regulators,” he predicted.

The lawyer warned that such a measure would be “costly” and make the use of the HBS to measure the solvency of defined benefit plans more likely.