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Stress tests should not be based on 'something hypothetical'

The IORP stress tests the European Insurance and Occupational Pensions Authority (EIOPA) wants to launch later this month should not be based on “something hypothetical”, according to Matti Leppälä, chief executive at PensionsEurope. 

Leppälä took particular issue with the controversial ‘holistic balance sheet’ accounting approach.

“Why does EIOPA need to stress the HBS, which does not exist yet and has not been approved by anybody?” he asked.

Further, he pointed out “we have not received a proper answer to this question” yet.

Leppälä told IPE he was “unsure whether EIOPA was really pushing the HBS” or using the stress tests to see whether “it makes sense”.

But he also stressed that his organisation did not support the HBS approach, as it was “conceptually wrong” and “unsuitable as a regulatory instrument”.

“Simpler alternatives”, such as ALM studies and continuity analyses, should instead be used, as the have the “same goals but are cheaper and have less model uncertainty because they are in use”.

Leppälä also criticised the stress test itself, which has “a lot of shortcomings because it has a short-term focus”.

“This stress test will give just a snap-shot picture,” he said.

“It does not enable the long-term evaluation of the sustainability of the IORP.”

He added: “For a long-term evaluation, you would need a dynamic stress test that includes the recovery periods – otherwise, you cannot draw any conclusions on whether the system is stable.”

He questioned whether the stress test – which includes DC plans for the first time – could provide any significant information on the impact on members and beneficiaries.

Leppälä also noted that EIOPA’s aim to cover at least 50% of the national markets was most likely to be achieved by getting the biggest pension funds to participate.

“Of course, if and when that happens, results will be biased and unrepresentative of the sector as a whole,” he said.

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