PensionsEurope and AEIP respond to EIOPA IORP stress-testing consultation

PensionsEurope and the European Association of Paritarian Institutions (AEIP) have welcomed the European Insurance and Occupational Pensions Authority’s (EIOPA) consultation on the methodological framework for stress-testing IORPs.

The associations said that they supported the proposed creation of a ‘toolbox’ consisting of relevant analytical tools and approaches as it could allow the introduction of further proportionality and create a better cost/benefit ratio.

They added that it was generally positive that EIOPA aims to implement a horizontal approach in future stress tests across both various types of IORPs (DB, hybrid and DC) and member states.

However, they warned that the heterogeneity of the IORP sector would make the horizontal approach “likely more complex and less comparable than one should hope for”.

The horizontal approach would “undoubtedly” increase the added value of the results of the stress tests, according to the response, but EIOPA should “recognise the shortcomings and incomparability” between scheme types and countries.

They urged EIOPA to take care that the approach does not create an excessive administrative burden or unbalanced cost/benefit ratio, especially for small- and medium-sized IORPs.

EIOPA was also encouraged to ensure that it communicates the stress-test results to the wider public effectively.

PensionsEurope and the AEIP were not in favour of disclosing the names of participating IORPs, as they did not recognise the arguments in favour of doing so.

Although cash-flow analysis is mentioned in the consultation, the associations believed that it could be mentioned more extensively in multiple sections, especially the paragraphs relating to risks, and were not supportive of the use of the Common Balance Sheet.

“To assess members’ and beneficiaries’ benefits, not the risk-free return but the long-term expected return should be used as the basis,” the response added.

“A calculation at the risk-free return can only come at the second place to give an indication of the risk but not to calculate the expected benefit or the expected replacement income at retirement.

“IORPs do not invest in a risk-free world, but as long-term investors they receive a risk premium (as well as an illiquidity premium) for the risk (and illiquidity) they accept. This should be correctly reflected in the results of the projection of the cash flows as well as in the results of the stress test.”

Finally, the associations issued their support for the proposed focus on climate risk within the broader field of potential environmental risks, as this risk is seen as the most material by the sector and the risk management tools are more advanced than other environmental risks.

However, they noted that climate risk was not a traditional type of risk, and this should be reflected in conclusions and communications made by EIOPA.

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