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21 June 2016

Investment & Pensions Europe: EIOPA repeats call for supervisory follow-up to IORP stress test

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The European Insurance and Occupational Pension Authority (EIOPA) has called for “further supervisory response” to the “vulnerabilities” identified in its stress test of European pension funds.

In its financial stability report for the first half of the year, the supervisory authority warns that the macro-economic and financial environment remains “extremely challenging” for insurers and occupational pension funds, and concedes that yields are likely to remain low for a prolonged period of time.

It also acknowledges that a “double-hit” scenario – involving a drop in the risk-free rate used to calculate liabilities combined with higher risk premia – cannot be ruled out.

EIOPA says it will factor in the problem of low yields and the double-hit scenario as part of its stress test of the European insurance sector later this year.

With respect to Institutions for Occupational Retirement Provision (IORPs), the “vulnerabilities” identified in the 2015 stress test of the occupational pension sector “need further supervisory response”.

Gabriel Bernardino, chairman at EIOPA, said: “Insurers and IORPs need to use robust risk-management practices to manage the ongoing macroeconomic challenges.

“With Solvency II, the risk culture in the insurance sector is significantly reinforced. In the IORPs sector, prudential regimes are not sufficiently risk-sensitive and thus might underestimate the risks.”

EIOPA’s report also highlights the funding situation in the occupational pension sector, noting that, based on preliminary data, “cover ratios seem to have dropped” among those countries reporting data for last year.

In this financial stability report, EIOPA points out that its 2015 stress test exercise for IORPs “underscored that current heterogeneous national prudential regimes are often not entirely sensitive to market price changes,” and warns this could lead to the underestimation of risk.

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© IPE International Publishers Ltd.

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