Today the European Insurance and Occupational Pension Authority (EIOPA) announced the results of the first EU stress test for occupational pensions. Lobby organisations as well as Germany had been trying to cancel or at least water down this stress test. The published results reveal a gloomy picture: defined benefit occupational pension schemes face a dramatic shortage of funding. Accruals currently set up by companies fall clearly short of the funding needs for the respective pensions. Especially for the UK and the Netherlands, but also Germany, this would mean that cooperations would have to stand in for these gaps. In case the interest rates remained lower for a longer time, the picture would even turn more gloomy.
Sven Giegold, financial and economic policy spokesperson of the Greens/EFA group commented:
“This stress test has revealed funding gaps of occupational pensions. EIOPA has underpinned worse case misgivings with numbers. According to a stress test scenario, EU occupational pension schemes face a funding gap of 773bn Euros in accruals. Even if as as baseline scenario the levels of interest rates and asset prices stabilised, there would still be a shortage of 428bn Euros. Consequently, in the UK the gap would be 218bn Euros, whereas for the Netherlands the gap would be 66bn Euros. National accounting standards conceal the funding gaps included in the balance sheets of many companies. As a result of the strongest stress test scenario, the funding gap for occupational pensions would even increase to 343bn Euros for the UK and 215bn Euros for the Netherlands. At the same time, the stress test covers only 38% of the UK market and 53% of the Dutch market.
The ostrich policy on life insurance and occupational pensions has to end now. In the European Parliament and in Member State parliaments we need a blank and honest debate on the lack of funding due to the low interest rates. It is unacceptable to just pretend problems do not exist. Now we still have the time to change direction. Our enterprises must not be allowed to be turned into pension collateral, expected to make up the gaps from profits that will be under increasing pressure. They have to be able to invest into future jobs. Yet it is equally unacceptable to simply assume hidden state guarantees. On the contrary it is high time to protect pensioners and enterprises with effective European rules.
The weaknesses of occupational pension schemes are even worse than this stress test proves. The test did not even include a realistic scenario with low interest rates on the long term combined with longer life expectancies (in fact EIOPA reports that most pension schemes do not include trends in life expectancy). The funding shortfall would have been much worse in the baseline scenario had it been calculated with realistic interest rate levels. EIOPA’s reference scenario still assumes that risk free interest rates will converge on 4.2 % (the „ultimate forward rate“) in the very long run, implying, for example, a 30 year rate of 2% when Eurozone 30 year rates are actually just over 1% .
The presentation of the stress test: https://eiopa.europa.eu/Publications/Surveys/2016-01-26%20Presentation%20for%20the%20press%20conference%20.pdf
The complete stress test: https://eiopa.europa.eu/Publications/Surveys/EIOPA%20IORPs%20Stress%20Test%20Report%202015%20bookmarks.pdf
The watered down EIOPA press release: https://eiopa.europa.eu/Pages/News/Results-of-the-first-EU-stress-test-for-occupational-pensions.aspx