Regulator tests resilience of DB schemes

Regulator tests resilience of DB schemes

The UK has come out well from a stress test of occupational pensions carried out by the European regulator.

Today (26 January) Eiopa published the results of its stress test, which looked into the resilience of defined benefit (DB) and hybrid pension schemes against adverse market scenarios and increased life expectancy.

It also looked at the potential vulnerabilities of defined contribution (DC) schemes.

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The regulator stated DB and hybrid schemes demonstrated relative resilience to a permanent decrease of 20 per cent in mortality rates but they appeared to be more sensitive to an abrupt drop in interest rates and an increase in inflation rates and to a severe drop in assets prices.

Gabriel Bernardino, chairman of Eiopa, said: “The occupational pensions’ stress test was the first exercise of this kind conducted at the European Union level.​

“While pension plan liabilities have a very long-term nature, it is important that supervisory regimes are prepared to deal with these stresses in a transparent way, be it through appropriate recovery periods, the role of pension protection schemes, increased sponsor’s contributions and/or benefit adjustment mechanisms.

“Further work needs to be done to analyse how prolonged adverse market conditions will affect the sponsors’ behaviour and the possible consequences for financial stability and the real economy.”

Out of a total 140 Europe-wide participants, 61 were UK DB schemes, representing coverage of more than 30 per cent of the assets under management in the UK DB universe and more than 40 per cent of the EU-wide participating schemes.

Andrew Warwick-Thompson, The Pension Regulator’s executive director for regulatory policy, said: “This report highlights certain risks and vulnerabilities for DB schemes under these particular stress scenarios.

“However, the scenarios tested by Eiopa were severe and the long term nature of pension liabilities means UK schemes and their sponsors can absorb stressed market conditions over an appropriate period, using recovery plans which smooth out the cost of employer contributions.

“A small number of schemes may struggle to meet their pension promises, but looking across the UK pensions system as a whole, there is sufficient flexibility to enable schemes to manage the impact of stressed scenarios.”

Francois Barker, head of pensions at Eversheds, said: “Unsurprisingly, the results of the stress tests show that a prolonged period of low interest rates would pose significant challenges to the resilience of such plans.

“More significantly, they confirm that Eiopa’s proposed holistic balance sheet methodology for assessing the solvency of defined benefit plans would add £350bn to Europe’s occupational pension deficit overnight.

“This would torpedo the European economy. With much of the pain being felt in the UK, Ireland, Belgium and the Netherlands.”