FRANKFURT, Jan 26 (Reuters) - An extended period of low interest rates will create significant challenges to the resilience of EU defined benefit occupational pensions, the EU’s insurance and pensions watchdog EIOPA said on Tuesday.
Unveiling the results of its first stress test of the occupational pensions sector, EIOPA said defined benefit and hybrid pension schemes showed relative resilience to a permanent decrease of 20 percent in mortality rates.
However, they also appeared to be more sensitive to an abrupt drop in interest rates and an increase in inflation rates as well as to a severe drop in amount of time plan members had before retirement.
“Eldest plan members have the highest pension wealth and the least time to recover from price falls of assets. Youngest plan members are most heavily impacted by long-term low return on assets,” the European Insurance and Occupational Pensions Authority (EIOPA), said in a statement.
The EIOPA stress tests, carried out in 17 EU and neighbouring countries last year, involved 140 defined benefit and hybrid pension scheme providers and 64 defined contribution schemes.
The watchdog said that this first set of stress tests needed to be followed up with further study on how prolonged adverse market conditions can affect pension schemes, financial stability and the real economy.
“While pension plan liabilities have a very long-term nature, it is important that supervisory regimes are prepared to deal with these stresses in a transparent way, be it through appropriate recovery periods, the role of pension protection schemes, increased sponsor’s contributions and/or benefit adjustment mechanisms,” EIOPA Chairman Gabriel Bernardino said in the statement. (Reporting by Jonathan Gould; Editing by Maria Sheahan)