EIOPA published the results of its 2019 Institutions for Occupational Retirement Provisions (IORPs) stress test. This biennial exercise assesses the resilience and potential vulnerabilities of the European Defined Benefit and Defined Contribution pensions sector, tailored to the specificities of the diverse European pensions sector and its potential impact on financial stability. For the first time, the European stress test exercise covered the analysis of Environmental, Social, and Governance (ESG) factors for IORPs. EIOPA also published a factsheet, a presentation by the EIOPA Chair Gabriel Bernardino, and the frequently asked questions on the IORP stress test.
Nineteen countries participated in the exercise, covering more than 60% of the national Defined Benefit and 50% of the national Defined Contribution sectors in terms of assets—in most countries. In total 176 IORPs participated, out of which 99 were Defined Benefit IORPs and 77 were Defined Contribution IORPs. The results of the 2019 stress test show that the European Economic Area pensions sector is better funded in the baseline compared to previous exercises. To some extent, this results from the absence of the UK sector from the exercise, which has been facing significant challenges in recent years and which—due to its size—had dominated previous EIOPA pensions stress tests. Yet, the second largest IORP sector in the European Economic Area, the Netherlands, was affected by the relatively high exposure to U.S. equities and the heavy U.S. market volatilities in the baseline at the end of 2018, which subdued in the course of 2019.
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 behaviors 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 countercyclical aspects of the expected investment behavior, yet would also come at a risk.
The majority of IORPs in the sample indicated having taken appropriate steps to identify sustainability factors and ESG risks for their investment decisions, which is important for an effective implementation of the IORP 2 Directive; however, only 30% of these IORPs have processes in place to manage ESG risks. Additionally, only 19% of the IORPs in the sample assess the impact of ESG factors on risks and returns of investments. The preparedness of IORPs to integrate sustainability factors is widely dispersed and seems correlated to how advanced the national frameworks were. EIOPA will follow-up on the findings and analyze, in more depth, the investment behavior of IORPs, in particular in the persistently ultra-low and negative interest rate environment. To do so, EIOPA will make use of the significantly improved pensions reporting from 2020. Going forward, EIOPA wants to further improve its analytical tool set for stress testing IORPs, extending the horizontal approach and, with that, assessing the common exposures and vulnerabilities of the Defined Benefit and Defined Contribution sectors together.
Keywords: Europe, EU, Insurance, Stress Testing, Occupational Pensions, IORPs, ESG, IORP2, Defined Benefit, Defined Contribution, Climate Change Risk, Sustainable Finance, EIOPA
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