CZECH REPUBLIC - All Czech pension funds have passed a stress test by the country's national bank (CNB) but the results show major weaknesses should interest rate levels climb steeply.

The CNB announced it is working on "new prudential measures" for pension funds in cooperation with the pension fund association.

"The aim is to put in place systemic mechanisms that will automatically trigger certain processes - such as provision of additional capital by shareholders - if a pension fund's equity declines below a specified threshold in the reference period."

Parliament is also discussing whether to allow pension funds to "value some bond holdings at amortised cost instead of fair value". 

As 87% of all pension assets in the Czech Republic are invested in bonds, the national bank fears a decline in bond prices triggered by rising interest rates could harm the funds considerably.

Indeed, a recession or even a depression would positively influence pension assets because in such scenarios the national bank predicts a fall in interest rates.

Only the third scenario tested by the bank, "market nervousness", includes rising interest rates which could lead to a halving of pension fund equity.

"If the one-year interest rates in scenario B ("market nervousness") rose by 2 percentage points (and long-term rates by 1 percentage point), the fall in bond prices would eliminate the whole liquidity buffer," noted the CNB in its report on financial stability in the Czech Republic.

But even in the "real world" further "bond price declines and thus further pension fund losses cannot be ruled out," the report added.

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