Dutch Pensions Federation: Stress test results could undermine trust

The Dutch Pensions Federation has said EIOPA’s use of the holistic balance sheet (HBS) for stress tests has lead to confusing results.

It said the large difference in outcomes between the HBS approach and the rules of the Dutch nFTK supervisory framework “could significantly undermine trust in pensions systems across Europe”.

Responding to EIOPA’s stress tests for pension funds, the industry group suggested EIOPA’s methodology seriously overvalued the level of possible rights cuts, while undervaluing the expected indexation.

According to the Federation, EIOPA’s estimation of rights cuts was €155bn – based on a single hypothetical Dutch pension fund with €1trn in assets and €907bn in liabilities – while under the rules of the financial assessment framework (nFTK), expected cuts would be no more than €4.2bn.

On the other hand, the valuation of indexation by the European supervisor amounted to €84bn, against €193bn of expected inflation compensation under the nFTK, it argued.

In the opinion of the Federation, such results carry a serious risk of miscommunication, “as many workers and participants would, albeit incorrectly, interpret EIOPA’s ‘market values’ as expected values”.

It added that it was nearly impossible to explain the large differences between the results from the HBS approach and the projections of the asset-liability management study based on the nFTK.

It said the same went for comparing the results of the stress tests for defined benefit and defined contribution schemes.

In its position paper, the federation said it would like EIOPA to use a more open, principle-based common framework, rather than the HBS applied in stress tests for defined benefit schemes.

It said an asset liability management (ALM) study, showing the future projections, would be preferable in future stress tests.

It added that the impact of stress and longevity scenarios on the contributions and pensionable income of participants would be more useful, and that using the stress tests applied to defined contribution plans would therefore be better suited to defined contribution plans as well.

The Pensions Federation also noted that the stress tests were expensive and labour-intensive for pension funds, and questioned whether there were any benefits of such tests for pension fund participants.

Clarifying the Federation’s position, Niels Kortleve, chairman of the organisation’s working group for pensions security, attributed the large difference chiefly to the emphasis on the worst-case scenarios in EIOPA’s HBS approach.

Kortleve, also innovation manager at the €182bn pensions provider PGGM, described the methodology used by EIOPA as “very complicated”, adding that he was unconvinced everyone at the European supervisor was fully aware of its technical implications.