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First European-wide stress test by EIOPA shows resilience and flexibility of UK pension schemes

Ref: PN16-03
Tuesday 26 January 2016

The Pensions Regulator (TPR) today responded to the first EU-wide pension stress test carried out by the European Insurance and Occupational Pensions Authority (EIOPA).

TPR strongly endorses the report’s conclusion that the flexibilities within the UK pensions sector mean there is only a limited link between pension schemes and financial stability. Alongside these flexibilities, high quality risk management and strong employer covenants are key for the resilience of UK schemes.

Andrew Warwick-Thompson, TPR’s Executive Director, Regulatory Policy, said: “We are not surprised that EIOPA’s pension stress test found only a limited link between pension schemes and financial stability. In our view, the results of the EIOPA pensions stress test illustrate the flexibilities under which UK pension schemes can operate. This means that they can respond to adverse market conditions in a variety of ways that suit their individual circumstances. In our view, it is important that this flexibility is allowed for in the regulation of pensions going forward.

“This report highlights certain risks and vulnerabilities for defined benefit (DB) schemes under these particular stress scenarios. However, the scenarios tested by EIOPA were severe and the long term nature of pension liabilities means UK schemes and their sponsors can absorb stressed market conditions over an appropriate period, using recovery plans which smooth out the cost of employer contributions.

“A small number of schemes may struggle to meet their pension promises, but looking across the UK pensions system as a whole, there is sufficient flexibility to enable schemes to manage the impact of stressed scenarios.

“We are very grateful to all the schemes that took part and helped us with this exercise.”

TPR worked closely with UK schemes and the UK pensions industry to develop the most appropriate approach to reflect the UK position in the exercise, while minimising the burden for schemes taking part in the stress test.

The UK has one of the largest and most developed occupational pensions systems in Europe and TPR wanted its strength and workings to be fully recognised by Europe.

UK results reflect the UK participants and not the UK pension universe as a whole. Out of a total 140 Europe-wide participants, 61 were UK DB schemes, representing coverage of over 30% of the Assets Under Management in the UK DB universe and over 40% of the EU-wide participating schemes.

Six UK schemes participated in the defined contribution (DC) exercise, representing coverage of over half of UK DC occupational scheme membership.

TPR plays an important role in providing technical input to EIOPA, the European Commission, and the European Parliament on the UK pensions system. It works closely with EIOPA to ensure the unique features of the UK pensions system are reflected by European policy makers.

Mr Warwick-Thompson added: “Funding defined benefits requires schemes to have a risk management approach in place so they can respond quickly to adverse market conditions. In order to provide further help to trustees on risk management, we recently published guidance on integrated risk management.”

The Pension Regulator’s DB code of practice gives guidance to trustees on how to manage their scheme’s funding. Any approach by trustees should reflect a reasonable balance between the needs of the scheme and minimising the impact on the employers’ sustainable growth plans.

The DB code of practice encourages trustees to use a variety of qualitative and quantitative approaches to risk management, examples of which include scenario testing and stress testing, to assess the impact of adverse events on the employer covenant, investments and funding plans. Approaches used should be proportionate to scheme and employer circumstances.

Editor's notes

  1. The EIOPA pension stress test covered both DB and DC schemes. The DC part of the exercise is presented in the EIOPA report as a 'satellite module' because it was conducted on a different basis.
  2. TPR worked with UK schemes and industry to develop the most simple and efficient approach to reflect the UK position whilst minimising the burden for schemes. Throughout the exercise TPR engaged with UK schemes to support their participation and worked closely with EIOPA to ensure that the UK results accurately reflect the exercise specifications as set out by EIOPA. TPR is obliged under EU law to assist EIOPA, although participation by schemes was voluntary.
  3. Whilst TPR provided EIOPA with assistance with its exercise, EIOPA’s work is independent of TPR’s casework.
  4. No decisions have been made at an EU level around the use of the holistic balance sheet (HBS). The HBS has been used in EIOPA’s pension stress test as the basis for the common methodology in order to provide a comparative tool only.
  5. TPR is the regulator of work-based pension schemes in the UK. We have objectives to: protect members’ benefits; reduce the risk of calls on the Pension Protection Fund (PPF); to promote, and to improve understanding of, the good administration of work-based pension schemes; to maximise employer compliance with automatic enrolment duties; and to minimise any adverse impact on the sustainable growth of an employer (in relation to the exercise of the regulator’s functions under Part 3 of the Pensions Act 2004 only).

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