17 December 2019

EIOPA publishes the results of the 2019 Occupational Pensions Stress Test

The EIOPA published the results of its 2019 Institutions for Occupational Retirement Provisions (IORPs) Stress Test. A stress test of pension schemes across the European Union wiped out €270 billion or almost a quarter of investments at funds that took part. For the first time, this European stress test exercise covered the analysis of ESG factors for IORPs.

This is a crucial, biennial exercise to assess the resilience and potential vulnerabilities of the European Defined Benefit (DB) and Defined Contribution (DC) pension sector, tailored to the specificities of the diverse European pension sector and its potential impact on financial stability.

In its 2019 exercise, EIOPA applied an adverse market scenario, characterised by a sudden reassessment of risk premia and shocks to interest rates on short maturities, resulting in increased yields and widening of credit spreads. That adverse market scenario was applied to the end-2018 'baseline' balance sheet of a representative sample of European Economic Area (EEA) IORPs. In the baseline, those IORPs were underfunded by EUR 41 billion on aggregate, which translates into 4% of their liabilities, according to the common methodology.

The adverse market scenario would have led to substantial aggregate shortfalls of EUR 180 billion according to national methodologies and EUR 216 billion following the stress test's common methodology. Under the assumptions of the common methodology, the shortfalls in the adverse scenario would have triggered aggregate benefit reductions of EUR 173 billion and sponsoring undertakings would have to provide financial support of EUR 49 billion. In the 2019 exercise, EIOPA employed an extended cash flow analysis, which provided important insights into the stress effects in terms of timing: IORPs' financial situation would be heavily affected in the short term, leading to substantial strains on sponsoring undertakings within a few years after the shock and resulting in potential long-term effects on the retirement income of members and beneficiaries over decades (should the short-term effects become permanent).

Assessing the potential conjoint investment behaviours of IORPs after the stress event, EIOPA observed an expected tendency to re-balance to pre-stress investment allocations within 12 months after the shock. That may indicate counter-cyclical aspects of the expected investment behaviour, yet would also come at a risk.

Matching the participating IORPs' investment information with Eurostat's greenhouse gas emission statistics by business sectors, indicates a relatively high carbon footprint, compared to the average EU economy, of the equity investments and, concentrated in a few Member States, of the debt investments.

Full press release on EIOPA

Full report on EIOPA

Related article on EurActiv "Pension schemes in EU show big shortfalls in stress test"

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