14 December 2017

Investment & Pensions Europe: EIOPA stress tests find Europe-wide deficit of up to €700bn

In its second stress test of 195 European occupational pension funds – IORPs, in EU regulatory parlance – from 20 countries, the supervisory authority found that providers of defined benefit (DB) and hybrid schemes had an aggregate deficit of around €300bn, corresponding to a funding ratio of 79%. This was on the basis of the different valuation standards used in individual countries.

On the basis of EIOPA’s “common balance sheet” – developed by EIOPA to enable comparisons and provide an EU-wide picture – the deficit deteriorated to €700bn, and the funding ratio to 38%.

In the defined contribution (DC) sector, the market value of invested assets would drop by 15% in the stress scenario, EIOPA found. If persistent, this could lead to lower pension income upon retirement.

For the first time, EIOPA’s IORP stress test sought to assess the potential impact on the real economy from shocks to the pension fund sector.

In the DB sector, the supervisory authority found that, in the modelled stress scenario, the sponsors of more than a quarter of DB and hybrid schemes might not be able to fully support their pension promises.

Their obligations could exert substantial pressure on the solvency and future profitability of the companies, EIOPA said.

For a quarter of the pension funds captured by the stress test, the value of sponsor contributions exceeded 42% of the company’s market value in the pre-stress scenario and 66% under the adverse scenario. This was on the basis of EIOPA’s “common balance sheet”.

“Benefit reductions have similar negative effects on the real economy by reducing household income and consumption, but also resulting in lack of trust in the pensions system,” said EIOPA.

In the DC sector, it said, the short-term effect on the real economy of lower replacement rates would depend on the extent to which DC members considered projected declines in retirement income in their current decisions about consumption and saving.

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