14 March 2023

AEIP and PensionsEurope position paper on EIOPA 2022 IORP Stress Test

In general, we support a climate stress test with a focus on transition risks. Climate change is perceived as the most material environmental risk and for transition risks more data is available than for physical (climate change) risks. Next to that, the transition risk seems more urgent.

Main messages
• We would like to thank EIOPA for good communication and constructive dialogue with us during the preparations and exercise of EIOPA 2022 IORP stress test. We appreciated it, and we look forward to continuing the dialogue with EIOPA to further define its stress testing methodology and to improve future stress tests.
• In general, we support a climate stress test with a focus on transition risks. Climate change is perceived as the most material environmental risk and for transition risks more data is available than for physical (climate change) risks. Next to that, the transition risk seems more urgent.
• It was positive that the scenario was not a double-hit scenario, which would have made it more unrealistic.
o Maintaining the original NGFS scenario and using a cash flow analysis approach as stress test methodology would, according to us, have made the stress test exercise more meaningful.
o The scenario did not capture the decarbonisation progress made by IORPs in their investment portfolio to date.
• We believe that a cash flow analysis would have been a better equipped methodology to fully capture the economic (climate change) scenario in a more meaningful way, since it takes into consideration the time factor.
o The DC schemes used the Common Balance Sheet (CBS) methodology for the first time, and they found it time consuming and more time consuming than what the application of cash flow analysis would have been. In particular for pure DC IORPs, the application of the CBS was not meaningful.
o We hope that in the future EIOPA would also conduct IORP stress tests only with a cash flow analysis as common methodology, instead of the CBS.
• IORPs were obliged to classify all their sponsoring companies based on the NACE codes, which caused a lot of work. We do not see the relevance or benefits of this classification for the purpose of EIOPA IORP stress test.
• While we see more relevance with the obligation for participating IORPs to provide data on their investments based on NACE codes, the obligation to use a look-through approach with NACE codes for UCITs also caused a big burden especially to small IORPs which invest significantly in UCITs.
o For the future IORP stress tests, we would find it important that the (NACE) requirements will be aligned with IORPs’ ordinary reporting requirements as far as it is possible, and data is available.
o If EIOPA wants to go more granular in the future, EIOPA should provide the required data. The obligation for IORPs to provide more granular NACE data is not the way forward.
• To assess members’ and beneficiaries’ benefits, the long term expected return should be used as the basis, instead of the risk-free return.
• In future stress tests, the impact on assets should be related to the impact on the pension outcome, which is also impacted by (the interest rates of) the stress scenario.
Position Paper on EIOPA 2022 IORP Stress Test
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• We note that around 70% of all the assets of participating IORPs were from the Dutch IORPs, as also last time. We would like to propose that next time EIOPA would provide the aggregated results both with the Dutch IORPs, and also without them.
• We note that usually EIOPA has an objective to analyse issues from members/beneficiaries’ point of view. For the DB schemes, EIOPA could have added a scenario in which it would have excluded benefit adjustments but included everything else. EIOPA could have done that easily by itself.
• In general, we appreciated that EIOPA asked qualitative questions on how IORPs consider ESG risks and investments, which made the exercise more interactive between EIOPA and participating IORPs than in the past.
• There are many best practices and approaches of how pension funds consider sustainability factors, and therefore, it is important to note that having a high share of ESG assets under the taxonomy does not become synonymous with responsible investment....

more in Full paper

 

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