EU Regulator Introduces Climate Stress Test for European Occupational Pension Sector

The European Insurance and Occupational Pensions Authority (EIOPA), an independent body of the European Commission, has announced the launch of its initial climate stress test to understand the impacts of the environmental crisis on the European Occupational pension sector.

The 2022 institutions for occupational retirement provision (IORPs) stress test was developed together by the European Systematic Risk Board and the European Central Bank.

It reflects a sudden, chaotic shift to climate neutrality due to delayed policy action, resulting in a significant increase in carbon pricing. The rapid increase in carbon prices has a transition risk effect on the overall economy.

The stress test focuses on the impact on IORP investments, but it also tackles the consequences on IORP financial situations, including sponsoring undertaking finance. Hence, the climate change scenario is applied to the balance sheet, both at the national and global levels. The scenario includes sector-specific shocks that give insights into the IORPs' investment portfolios, indicating the related impairment of the assets, broken down into the most significant industries and business activities.

The exercise also includes two specific questionnaires: one to request information in response to the ESG analysis of the 2019 IORP stress test, and another to allow an analysis to identify and understand the potential effects of inflation on members' and beneficiaries' retirement income, with a focus on the extent to which scheme characteristics and national frameworks provide for mitigating measures or adaptations to protect against inflation.

Participating IORPs are invited to EIOPA's debut event on April 7, 2022, and can access an EIOPA Q&A procedure by contacting their national authorities.