December 13, 2017

EIOPA published the report describing results of the 2017 Occupational Pensions Stress Test. The European defined benefit (DB) and hybrid occupational pension sector has, on average, insufficient assets to meet pension liabilities on the national balance sheet, both in the baseline and adverse market scenario. These vulnerabilities are even more pronounced on the common, market-consistent balance sheet, providing a more comparable and realistic view of the financial position of the Institutions for Occupational Retirement Provision (IORPs).

The shortfalls on the common balance sheet—EUR 349 billion in the baseline and EUR 702 billion in the adverse scenario—would need to be covered by increased sponsor support and/or by benefit reductions. The defined contribution (DC) occupational pension sector would experience a drop of 15% in the market value of investment assets in the adverse scenario, reducing the individual accounts of DC pension scheme members and, in case the scenario persists, leading to lower pension income when the members enter retirement. More than a quarter of IORPs providing DB and hybrid schemes are covered by a sponsor that may not be able to (fully) support the pension promise following the adverse scenario. In addition, the stress test results show that pension obligations may exert substantial pressure on the solvency and future profitability of companies with a potential spillover to the real economy.

The exercise assessed the resilience of IORPs to a "double-hit" scenario, combining a drop in risk-free interest rates with a fall in the price of assets held by IORPs. The exercise also assessed the potential transfer of shocks from IORPs to the real economy and financial stability through sponsor support and benefit reductions. The stress test is not a pass-or-fail exercise for the participating IORPs. The stress test covered DB and hybrid as well as DC schemes. Overall, 195 IORPs from twenty member states of the European Economic Area participated in the exercise, representing a coverage rate of 39% of total assets. EIOPA’s target coverage rate of 50% was not reached in some member states due to the lack of power of the respective national competent authority to require participation in the exercise. Such inadequate supervisory powers constitute an additional risk because relevant authorities are not able to assess vulnerabilities during adverse market conditions.

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Keywords: Europe, EU, Insurance, Stress Testing, Occupational Pensions, IORP, DB, DC, EIOPA

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