December 19
Regulator under stress

Last week, EIOPA published the results of their 2nd EU-wide stress test. As part of the stress test exercise, EIOPA ask National Supervisory Authorities (“NSAs” – the Pensions Regulator in the UK) to collate information from pension schemes on how they would be affected by an “adverse market scenario” (effectively a significant fall in asset prices alongside a fall in risk-free interest rates). EIOPA then compile the results and look at how resilient pension schemes in the European Economic Area (“EEA”) are to an economic shock.

Full details of the test and its results can be found here.
More interesting than the actual results of the test, in my opinion, were comments from EIOPA in their report about the Pensions Regulator (“tPR”). EIOPA expects NSAs to obtain data covering at least 50% of the total DB assets in each country. For this latest exercise, tPR achieved just 25% coverage. This is a problem for EIOPA as the UK makes up over 50% of the total DB assets in the EEA. Any shortcomings in the UK are therefore a material shortcoming of the exercise as a whole. In contrast the Netherlands, the other key player in Europe with 37% of the total DB assets in the EEA, managed over 50% coverage.
EIOPA were scathing of tPR in their 96-page report. On the first page of the Executive Summary it read the following:
“Target participation rates were not reached in some Member States, particularly in IE and the UK, with respect to the DB sector, which the respective authorities mainly attributed to a lack of powers to require participation in the exercise. In EIOPA’s view, these inadequate supervisory powers in certain jurisdictions are one of the key findings of this exercise and may be a source of risk as national and EU authorities may not be able to assess all relevant information and vulnerabilities of the sector during adverse events.”
I have a lot of sympathy for tPR in this instance. Under EU law, tPR is obliged to assist EIOPA but does not have the power to enforce participation from UK pension schemes. EIOPA also require NSAs to follow a ‘bottom-up’ approach to the stress test, with individual pension schemes providing the information directly. TPR would be far better suited to a ‘top-down’ approach, drawing on the data collected each year through the scheme return process. However this approach is not viable for many other European NSAs who do not hold the same level of data centrally as tPR.
EIOPA is hopeful that the IORP II directive will “ensure enhanced participation” in these exercises in future, through an extension of the powers of NSAs. IORP II becomes national law in the UK in January 2019 – 3 months before the UK is due to leave the EU. It therefore seems probable that we will see some form of IORP II implemented in the UK. In the meantime, tPR remains stuck between a rock and a hard place.
shutterstock_287793017 - stress ball image for stress test blog (ID 1975755).jpg

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