April 02, 2019

EIOPA launched its biennial stress test of the occupational pensions sector in EU. The published documents include Institutions for Occupational Retirement Provision (IORPs) stress test specifications, reporting templates, response templates, calculation tool, supporting spreadsheets, and adverse scenario for the EU-wide pension fund stress test in 2019. Participating IORPs must complete the exercise and submit results to the relevant national supervisory authority by June 19, 2019.

This exercise is expected to allow important and relevant insights into the resilience and potential vulnerabilities of the European occupational pensions sector. For the first time, a European stress test includes an assessment of Environmental, Social, and Governance (ESG) exposures.The core assessment refers to the direct impact of a stressed market scenario on the sustainability and funding of Defined Benefit pension funds and on the projected future retirement income of members of Defined Contribution (DC) pension funds. Developing further the methodologies and approaches used for previous exercises, the 2019 stress test has been complemented to assess pension funds' potential reaction to the adverse market scenario on their investment allocation, to understand better possible conjoint investment behaviors that may be relevant for the stability of the financial markets. Also, the effects of conditional cash in- and out-flows, which may mitigate or amplify the effects of the adverse market scenario on Defined Benefit pension funds, can be assessed following an enriched cash flow analysis.

For the 2019 exercise, EIOPA decided to add an analytical component to focus on pension funds' current exposures and risk management practices regarding ESG factors, which will provide a relevant starting point for ESG-related financial stability assessments of the European financial sector. Addressing stakeholder feedback, the 2019 Occupational Pensions Stress Test has been initiated on an expeditious timeline to allow pension funds significantly more time to conduct the exercise and for national competent authorities to evaluate the results. A dedicated questions & answers (Q&A) process with timely publications and a centralized validation procedure will further enhance the practicability and quality of the exercise. The results and conclusions of the stress test are expected to be published by the end of 2019.

 

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Keywords: Europe, EU, Insurance, IORPs, Defined Benefit, Defined Contribution, Stress Testing, ESG, Occupational Pensions, EIOPA

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