Low interest rates more of a challenge to defined benefit pension schemes across the EU than people living longer, says pensions watchdog

Postponed interest rate rises will be the real cause of problems for those providing defined benefit (DB) pensions, not people living longer.

According to results released today from a stress test on occupational pensions by the European Insurance and Occupational Pensions Authority (EIOPA), DB schemes showed greater sensitivity to sudden falls in interest rates and rises in inflation than they did to a falling mortality rate.

Gabriel Bernardino, chairman of the EIOPA, remarked: "While pension plan liabilities have a very long-term nature, it is important that supervisory regimes are prepared to deal with these stresses in a transparent way, be it through appropriate recovery periods, the role of pension protection schemes, increased sponsor’s contributions and/or benefit adjustment mechanisms."

Meanwhile, the EIOPA's study, which was the first of its kind to take place at an EU level, also determined that the impact of market conditions on defined contribution (DC) pensions varied depending on how close plan holders were to retirement. For example, the younger the scheme member, the more likely they were to feel the effect of a low rate of return on assets.

However, The Pensions Regulator pointed out that pension schemes in the UK were generally more flexible than their continental counterparts and, as a result, the link between financial stability and scheme performance is less pronounced.

"In our view, the results of the EIOPA pensions stress test illustrate the flexibilities under which UK pension schemes can operate," commented Andrew Warwick-Thompson, executive director, regulatory policy at The Pensions Regulator. "This means that they can respond to adverse market conditions in a variety of ways that suit their individual circumstances.

"In our view, it is important that this flexibility is allowed for in the regulation of pensions going forward."

In October last year, JLT Employee Benefits warned that aggregate liabilities across UK private sector pension schemes could rocket up by £62bn if an interest rate rise failed to materialise one year after the market expected it to.