The European Association of Paritarian Institutions (AEIP) and PensionsEurope have published a joint response to the European Insurance and Occupational Pensions Authority’s (EIOPA) 2022 IORP stress test, outlining their support for a climate stress test with a focus on transition risks.

While the associations stated that it was positive that the scenario used by EIOPA was not a ‘double-hit’ scenario, which would have made it more 'unrealistic', they argued that maintaining the original Network for Greening the Financial System (NGFS) scenario and using a cashflow analysis approach as stress test methodology would have made the stress test more meaningful.

Furthermore, they noted that the scenario did not capture the decarbonisation progress made by IORPs in their investment portfolios to date.

AEIP and PensionsEurope believed that a cashflow analysis would have been a better-equipped methodology to fully capture the economic scenario, as it would have taken into account the time factor.

EIOPA used the Common Balance Sheet (CBS) methodology for the stress test, with the AEIP and PensionsEurope stating that many defined contribution (DC) schemes were using this for the first time and found it more time consuming than a cashflow analysis would have been.

The associations added they did not see the relevance or benefit of obliging IORPs to classify their sponsoring employers based on NACE codes, and while they saw more relevance for IORPs to provide investment data based on NACE codes, the obligation to use a look-through approach with NACE codes for UCITs caused a burden to smaller IORPs that invest significantly in UCITs.

“For the future IORP stress tests, we would find it important that the NACE requirements will be aligned with IORPs’ ordinary reporting requirements as far as it is possible, and data is available,” the association’s position paper stated.

“If EIOPA wants to go more granular in the future, EIOPA should provide the required data. The obligation for IORPs to provide more granular NACE data is not the way forward.”

AEIP and PensionsEurope also called for long-term expected return to be used as the basis to assess members’ benefits, rather than risk-free return.

Furthermore, they argued that the impact on assets should be related to the impact on the pension outcome in future stress tests, which is also impacted by the interest rates of the stress scenario.

The associations noted that around 70 per cent of the assets of participating IORPs were Dutch funds, and proposed that EIOPA provided the aggregated results both with and without Dutch IORPs next time.

Additionally, for defined benefit (DB) schemes, EIOPA could have added a scenario in which it would have excluded benefit adjustments but included everything else, according to the associations.

Despite the list of suggested changes, AEIP and PensionsEurope praised EIOPA for asking qualitative questions on how IORPs consider ESG risks and investments, which made the exercise more ‘interactive’.

They also thanked EIOPA for its good communication and constructive dialogue during the preparations and exercise of the stress test, and stated that they looked forward to continuing this dialogue with EIOPA on future stress tests.

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