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Pension scheme stress testing – 2017 and beyond?

Pensions Corporate Consulting|Retirement
UK Insights on Brexit

December 15, 2017

EIOPA publishes results of  2017 pension scheme stress tests

Yesterday evening, the European Insurance and Occupational Pensions Authority (EIOPA) published the results of its 2017 pension scheme stress test.

In line with its constituting regulation, EIOPA carries out biennial stress tests on insurers and pension schemes – alternating between the two. This year, the tests focus on a 1-in-200 stress to financial markets, rather than looking at any other stresses such as a longevity or demographic event.

Despite EIOPA’s melodramatic reference to the results identifying “spill-over risks into the real economy”, the tests do not reveal anything new to national regulators. UK pension schemes – alongside those of other participating European Union countries – are underfunded. This is on both what are termed the national balance sheet basis and the common methodology (what was previously referred to as the holistic balance sheet). Again, it is of little surprise that the post-stress scenario looks worse than the pre-test position on both bases.

For example, on the national balance sheet approach, the UK overall deficit would double under their test scenario, and the funding percentage reduce from 90% to 79%. This is not significantly different from other countries – for example the Netherlands would decline from 98% to 74%. Using the common methodology (which values liabilities in a similar way to how a buy-out cost is estimated), the stress tests continue to highlight the key reliance on sponsor support and the Pension Protection Fund inherent in the UK funding regime.

The future?

The next stress tests for pension schemes are due in 2019. This is, of course, the year of Brexit. A key issue will be whether supervisory oversight from EIOPA is maintained for UK pension schemes (and insurers) as part of a deal on the free movement of services. If it is, this could present future regulatory burden for UK pension schemes.

Participation in the EIOPA stress tests is voluntary. In 2015, around 60 pension schemes took part in the exercise. In 2017, this reduced to 48. Indicating frustration on EIOPA’s part, it has concluded in its report that the Pensions Regulator (alongside its Irish counterpart) does not have powers sufficient to compel participation in the exercise. There is a proposal to increase the powers of the European Supervisory Authorities (ESAs). If this comes to pass it would enable EIOPA to compel individual schemes to take part, and to issue fines where schemes do not comply. This could reveal how much the UK Regulator has shielded schemes from the pain – and expense – of the full stress testing to date.

As with many aspects in the wider economy, it will all come down to the Brexit deal and how much reach EIOPA and the other ESAs will have.

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