Pension schemes in EU show big shortfalls in stress test

Protesters hold a sign reading 'Make our pensions great again' as they participate in a demonstration against pension reforms near Bastille Square in Paris, France, 17 December 2019. [Ian Langsdon/EPA/EFE]

A stress test of pension schemes across the European Union wiped out €270 billion or almost a quarter of investments at funds that took part, the EU’s insurance and pensions watchdog said on Tuesday (17 December).

Many of the schemes were also not considering the impact of environmental, climate and social risks on their investment decisions, the European Insurance and Occupational Pensions Authority (EIOPA) said in a statement.

Investments by the tested schemes in shares also showed a high carbon exposure compared to the EU economy overall, it added.

Nearly 180 pension schemes from 19 countries participated in the test aimed at showing how they would cope with severe, theoretical market stresses, and the impact on benefits paid out and on sponsors.

The EU watchdog only gave aggregate results, with no scheme named or pass or fail hurdle.

The participating schemes had a combined “baseline” underfunding of €41 billion, or 4% of liabilities at the end of 2018, a sign of how the sector is already struggling in an ultra-low interest rate environment even before the test was conducted, EIOPA said.

“The adverse market scenario would have led to substantial aggregate shortfalls of €180 billion, according to national methodologies and €216 billion following the stress test’s common methodology,” EIOPA said.

This would have translated into an aggregate cut in benefits of €173 billion under the common methodology, requiring sponsors of the schemes to inject a combined €49 billion.

“EIOPA will follow up on the findings and analyse in more depth the investment behaviour… in particular in the persistently ultra-low and negative interest rate environment,” EIOPA said.

For the first time EIOPA’s test covered risks from environmental, social and governance factors, commonly known as ESG, which has become a selling point for investments.

Most of the schemes in the sample said they had taken appropriate steps to identify ESG risks to their investment decisions.

But only 30% of them have processes in place to manage ESG risks, and only 19% assess the impact of ESG factors on investments’ risk and returns, EIOPA said.

“Let’s be honest, there is a lot to be done in this area,” EIOPA Chair Gabriel Bernardino told reporters.

He said a key takeaway from the test is the need for pension funds to diversify their investments to avoid too much geographic and economic sector concentration.

The next stress test will be in 2022.

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