LONDON (Reuters) - European Union company pension schemes will be tested to see how they would cope with a “double hit” of lower interest rates and asset prices, the bloc’s pensions and insurance watchdog said.
The European Insurance and Occupational Pensions Authority (EIOPA) gave details on Thursday of its second, biannual “stress test” of theoretical shocks to major company pensions.
The exercise mirrors the “low for long” interest rates of recent years that have left many schemes with deficits.
EIOPA Chairman Gabriel Bernardino said that learning from the first test in 2015, this year’s test will also examine how shocks in the pensions sector could reverberate more widely.
“It will provide up-to-date information on the vulnerabilities of the occupational pensions sector and the possible repercussions for the stability of the wider financial system and European economy,” Bernardino said in a statement.
The stress test will cover defined benefit and defined contribution, as well as “hybrid” pension schemes.
Pension schemes being tested must complete the exercise by July 13, and EIOPA will publish the results in aggregated form by the end of the year.
The test will look at the impact of lower “risk free” interest rates on pensions. This is the yield on high quality government bonds which is used by pension funds to discount their liabilities to present value to compare with assets and check how well they are funded.
It also seeks to accentuate what has already been happening as actual risk free rates have fallen since EIOPA’s last test.
The regulator said real interest rates had fallen further since, with a decline in nominal interest rates accompanied by “a rise in break-even inflation rates to levels comparable to the second adverse market scenario in the 2015 stress test”.
Editing by Alexander Smith