EU watchdog plans first pensions stress tests by end-2015

The European Union’s pensions and insurance watchdog aims to complete stress tests on pension funds by the end of 2015, its chairman said, in one of the world’s first examinations of how the funds can cope with market dislocations.

Gabriel Bernardino, chairman of the European Insurance and Occupational Pensions Authority (EIOPA), told Reuters in an interview at the Reuters Financial Regulation Summit that the regulator had a target to test pension funds representing up to 50 per cent of assets or members across 17 EU countries.

The tests on the EU's €3 trillion pension fund sector follow the first stress tests on insurers carried out by EIOPA last year, ahead of Solvency II regulations to be introduced in January 2016.

“I think it’s particularly important right now in Europe, due to the market situation we have, that we do this exercise,” Mr Bernardino said.

In the low interest rate environment of the past few years, pension funds have found it difficult to earn sufficient returns on bond investments to pay their pensioners, encouraging a move into riskier assets such as equities or real estate.

The situation has got worse this year, with some bonds posting negative yields, as the European Central Bank started a €1 trillion bond buying programme.

Pension funds have also moved to fill a gap left by banks after the financial crisis, lending directly to long-term infrastructure projects, which are hard to exit in a hurry.

This shift in the funds’ role has started to attract regulators’ attention.

“We are definitely a little bit ahead in this area, this is not so common,” Mr Bernardino said of the planned tests, adding they were among the first of their kind.

Mr Bernardino said at the summit the stress tests would cover pension funds’ market risk in their portfolios, the risks posed by low interest rates and by longevity - that pensioners live longer than expected.

Reuters