DNB published results of the EIOPA stress testing exercise for the Dutch pensions sector. The results show that the financial position of the Dutch pensions sector is vulnerable to financial market shocks. A highly adverse stress scenario, which involves sharp equity price declines and rapidly widening spreads, showed that the year-on-year impact of a financial market shock on the Dutch economy through the pension funds is limited, but will be felt for many years.
DNB disclosed the list of the stress test participants, which represent 60% of the Dutch pensions sector. The results of the stress test, which looks at the figures as of year-end 2018, show that Dutch pension assets appear to be vulnerable under a major shock. In such a scenario, the capital positions of Dutch pension funds are severely hit. This impact is due to the large portfolio of variable-yield investments they maintain to fund their indexation ambition. On average, the funding ratio of participating pension funds drops by nearly 23 percentage points, which roughly equals their required own funds. This means that the pension funds could have absorbed the impact of the shock almost fully using their buffers, had they maintained the required own funds. With the buffer lacking and the assumed funding ratio averaging 99%, the shock forces them to apply immediate benefit curtailments.
The stress scenario sees assets of the Dutch premium pension institutions, or PPIs, drop by nearly 30%, primarily due to the equity shock. The premium pension institutions tend to allocate a large proportion of their investments to variable-yield assets on account of the relatively high share of young pension scheme members they represent. The stress test also considered the impact of the stress scenario on replacement ratios (excluding state pensions). The outcomes showed a large variety because the premium pension institutions differ widely.
Related Link: DNB Analysis of Results
Keywords: Europe, Netherlands, Insurance, Pensions, Stress Testing, Defined Benefit, Own Funds, Defined Contribution, DNB
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