January 26, 2016 / 5:02 PM / 2 years ago

EU pension stress tests show hit from low interest rates

An European Union flag flutters outside the EU Commission headquarters in Brussels, Belgium, January 12, 2016.Francois Lenoir

FRANKFURT (Reuters) - Stress tests of Europe's employer pension providers have highlighted an increasing threat posed by prolonged low interest rates, the European Union's insurance and pensions watchdog EIOPA said on Tuesday.

Unveiling the results of its first test of the occupational pensions sector's resilience to various adverse shocks, EIOPA said near-zero interest rates would create "significant future challenges" requiring close monitoring by pension funds and national pensions supervisors.

While the scenarios tested by EIOPA - including low interest rates, inflation and drops in the value of assets - were hypothetical, the gap with the real world was narrowing, said Gabriel Bernardino, chairman of the European Insurance and Occupational Pensions Authority (EIOPA).

"Reality is not so different from the stresses we are making and that gives even more relevance to the conclusions," Bernardino told a press briefing.

The European Central Bank has slashed interest rates and launched a money-printing campaign to try to boost growth, but that effort has driven down returns needed by insurers and pension funds to meet future promises to clients.

EIOPA looked at the balance of assets and liabilities among defined benefit and hybrid occupational pension schemes in 17 EU and neighbouring countries, developing its own common methodology to allow cross-country comparisons.

Even before applying any shock scenarios, it found liabilities exceeded assets by about 428 billion euros ($464 billion), or 24 percent of total liabilities, under its common methodology.

That deficit ballooned out to 773 billion euros under a severe adverse market scenario that included a fall in asset prices and interest rates, as well as an increase in inflation rates.

European Parliament member Sven Giegold, of the German Green Party, said EIOPA's stress test showed more discussion was needed about the asset-liability gap from low interest rates.

"Procrastination on this problem is not acceptable; it would be reaching into the pockets of the younger generation," Giegold said.

EIOPA cautioned not to read too much into the deficit figures, pointing out that both the liabilities and the opportunities to correct any problems tend to be very long term. Gaps can also be covered by increasing the contribution of pension sponsors or adjusting pension benefits, it said.

Frank Grund, head of insurance and pension supervision at German financial watchdog Bafin, also played down the urgency.

"You can assume that pension funds' adjustment measures, possibly made in conjunction with additional payments by their sponsoring employers, likely will be able to ensure that the promised benefits will be met," Grund said in a statement.

The EIOPA stress tests, carried out last year, involved 140 defined benefit and hybrid pension scheme providers and 64 defined contribution schemes.

EIOPA plans a second stress test of the sector in 2017.

Editing by Maria Sheahan and Adrian Croft

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