FRANKFURT/LONDON (Reuters) - Greater clarity is urgently needed on the extent of underfunding of corporate pensions in Europe and the potential impact this could have on financial stability, a top EU financial regulator said.
“Everybody is much more aware of the vulnerabilities now,” Gabriel Bernardino, chairman of the European Insurance and Occupational Pensions Authority (EIOPA), said in an interview in Frankfurt for the Reuters Financial Regulation Summit.
Negative interest rates are dragging down investment returns and raising concerns about the ability of companies’ defined benefit pension programs to pay what they promised to future retirees, Bernardino said.
The problems facing pension funds are similar to those at life insurers who offered long-term guaranteed interest rate policies, but Europe’s pensions market rules are more fragmented, with big differences between countries.
Germany’s financial watchdog warned this month that some of that country’s pension funds may soon be unable on their own to fully meet their obligations, and the funds were suffering more than insurers from low interest rates.
“It is an urgent issue but I would not want to characterize it as a bigger or smaller one than the insurance sector,” EIOPA’s Bernardino said when asked if Germany’s situation applied more broadly.
EIOPA released the results of its first stress test for pension funds earlier this year, showing that even before it applied hypothetical shock scenarios, liabilities exceeded assets by about 428 billion euros ($480 billion) or 24 percent of total liabilities.
That deficit ballooned to 773 billion euros under a severe adverse market scenario including a fall in asset prices and interest rates, as well as an increase in inflation rates.
Many companies in Britain and other countries are closing defined benefit schemes already to new employees, and pensions can complicate plans for strategic realignments, such as at steelmakers Tata (TISC.NS) and ThyssenKrupp (TKAG.DE).
While pensions deficits might be a slow-burn problem, complacency was not an option, Bernardino said.
“We think the commitments in the defined benefit plans in Europe should be valued according to a more realistic basis and that this should be transparent both to companies and employees, to help foster a proper dialogue on the sustainability of these promises,” he said.
“We need timely adjustments, not just ‘kicking the can down the road’,” he said.
EIOPA’s next pensions stress tests, due in 2017, will look more closely at pension plan sponsors and the impact of their actions more broadly.
“Fact is, there are only two solutions: either sponsors put in more money, or you reduce the pension benefits,” he said.
“If they (sponsors) have to add more to their funds, this could have implications for the economy and financial stability,” Bernardino said.
Financially weak companies in low growth economies might find it especially hard to stump up the cash needed to fill their pensions coffers, but both EIOPA and national supervisors needed better information on the scope of the problem before seeking remedies.
“We need clarity before solvency,” Bernardino said.
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Additional reporting by Huw Jones in London; Editing by Susan Fenton