European Occupational Pension Funds Show Resilience to Potential Crisis Scenarios

European occupational pension funds are generally well positioned in terms of liquidity to withstand potential crisis scenarios. This is the main conclusion of the first stress test conducted on the sector by EIOPA (the European Insurance and Occupational Pensions Authority). The results were released recently, and Mapfre took part in the exercise.

EIOPA subjected a total of 156 pension funds from institutions for occupational retirement provision (IORPs) from 18 European countries to the stress-testing exercise. Together, these funds represent approximately 60% of the sector’s total assets. Around 20 of the pension funds included in the stress test sample are Spanish.

Mapfre participated in the stress test through its Mapfre Vida Dos Pension Fund. EIOPA does not publish institution-specific results from these exercises, but instead issues an aggregate assessment covering the sector as a whole.

The stress test was designed by EIOPA to focus on the sector’s liquidity resilience. It does not involve pass-or-fail outcomes, but rather aims to help supervisory authorities understand how a crisis scenario could affect European occupational pension funds and to identify potential vulnerabilities within the sector.

Results

Overall, occupational pension funds demonstrate “a solid liquidity position, with sufficient cash buffers and positive net cash flows,” EIOPA concludes based on the stress test results. The tests exposed the sector to “severe but plausible” scenarios in which funds were required to cope with liquidity shocks and increased demands from financial markets.

According to EIOPA, the results of the stress test indicate that occupational pension funds have the necessary “flexibility” to effectively manage the challenges that a critical situation could pose to their liquidity. “IORPs are, by nature, long-term investors and, in general, exhibit a solid liquidity profile,” explains the analysis team at Mapfre Economics.

Funds participating in the stress-testing exercise generally demonstrated their ability to adapt to critical conditions by “adjusting their investment strategies,” according to EIOPA, which also notes that, for the first time, the entities examined were able to apply discretionary management measures within the framework of the stress tests.

Next Steps

After conducting a comprehensive assessment of the liquidity position of European occupational pension funds under a range of stress scenarios and concluding that the sector is resilient overall, EIOPA will continue to analyze the results of the exercise to gain a deeper understanding of the sector’s risks and vulnerabilities.

Liquidity risk management at pension funds has become an increasingly important priority for EIOPA. The supervisory authority has taken steps to ensure that asset managers integrate this specific risk into their governance frameworks and plans to continue reviewing the sector through future stress-testing exercises.

In its latest Sector and Economic Outlook report, Mapfre Economics presents an in-depth analysis of the results of EIOPA’s stress tests. You can view the report here.