European occupational defined benefit funds and hybrid plans have insufficient assets to cover their liabilities, according to the 2017 stress test conducted by the European Insurance and Occupational Pensions Authority, a European Union regulator.
EIOPA said Wednesday that 25% of 195 sponsoring employers known in Europe as European Institutions for Occupational Retirement Provisions, or IORPs, which participated in the stress test collectively lack €349 billion ($411 billion) and might not meet their obligations. EIOPA also calculated this shortfall could be as much as €702 billion in adverse market conditions.
Europe's insurance and pension watchdog warned that restoring the sustainability of IORPs could lead to a pressure on corporate solvency and younger generations.
The stress test found that for a quarter of IORPs, the value of sponsor contributions on the balance sheet exceeded 42% of the sponsors' market value in pre-stress conditions, and 66% during the stressed scenario, the regulator said in a news release.
EIOPA also tested the resilience of defined contribution plans concluding that occupational DC plans would see a 15% decrease in the market value of investment assets in the adverse market scenario.
Gabriel Bernardino, chairman of EIOPA said in the news release: "The stress test results show that the risks stemming from shocks on the European IORPs sector could also spill over into the real economy with negative implications on economic growth and employment triggered by increased sponsor (contributions) or benefit reductions. To gain further insights and to deepen supervisory understanding, EIOPA will conduct a horizontal assessment of potential systemic risk drivers such as search for yield, flight to quality or herding behavior."
The stress test covered 39% of total assets held by IORPs. EIOPA said it missed its target of testing 50% of EU pension funds due to the respective national watchdogs lacking the power to require participation in the test.