Occupational pension funds’ increasing allocations to private market assets are strengthening long-term diversification but also creating new liquidity management challenges, according to the European Insurance and Occupational Pensions Authority (EIOPA).
In its latest Financial Stability Report, the European supervisor said institutions for occupational retirement provision (IORPs) have continued to increase their exposure to illiquid asset classes, reflecting their long-term investment horizons and search for higher returns.
In the report, Petra Hielkema, EIOPA’s chair, said: “Elevated public debt levels, growing fiscal demands and geopolitical uncertainty contributed to episodes of volatility in sovereign spreads during 2024 and 2025. Although market conditions improved towards the end of last year, these episodes highlighted that investor sentiment can shift rapidly and that sovereign risk remains an important transmission channel for broader financial instability.”
The report noted that IORPs remain well placed to invest in illiquid assets because they generally benefit from stable, long-term liabilities.
However, EIOPA cautioned that growing allocations to private equity, private debt, infrastructure and other alternative assets require robust liquidity management and governance frameworks.
“The growing role of private markets and non-bank financial intermediaries is reshaping how savings are channelled into the economy and how risks are distributed across the financial system,” Hielkema noted.
According to the report, investments in investment funds remain the largest asset class for European IORPs, accounting for around 72% of total assets at the end of 2025. Within these portfolios, pension funds have continued shifting towards alternative investment funds, increasing their exposure to private market strategies.
EIOPA said the trend offers diversification benefits and the potential for enhanced long-term returns, but also exposes pension funds to valuation uncertainty, concentration risk and reduced liquidity compared with publicly traded assets.
The findings broadly align with positions recently set out by Pensioenfederatie during the review of the IORP II Directive.
The Dutch pensions association has argued that the prudent person principle should continue to give IORPs flexibility to invest in infrastructure, private equity and private debt, while warning that benchmarking requirements could discourage long-term investment in illiquid assets.
While Pensioenfederatie has emphasised the role of private markets in supporting long-term returns and financing the real economy, EIOPA’s report underlines that larger allocations also require stronger liquidity management and governance.
The supervisor warned that the combination of higher allocations to illiquid investments and a more uncertain macroeconomic and geopolitical environment could test pension funds’ liquidity management capabilities, particularly during periods of market stress.
While defined benefit schemes typically have predictable long-term cash flows, EIOPA noted that pension funds still need sufficient liquid resources to meet benefit payments, collateral calls and other operational obligations without being forced to dispose of illiquid assets at unfavourable prices.
The report also highlighted the importance of sound governance, risk management and regular stress testing as pension funds continue expanding their exposure to private markets.
Despite these emerging risks, EIOPA said the occupational pensions sector remained resilient throughout 2025. Aggregate assets continued to grow, supported by positive investment performance and stable contributions, while the sector was able to absorb episodes of financial market volatility linked to geopolitical tensions and changing expectations for interest rates.
Overall, EIOPA concluded that European insurers and occupational pension funds have demonstrated resilience amid heightened uncertainty.
Nevertheless, it said supervisors should continue monitoring the implications of increasing investment in less liquid asset classes, as well as broader financial sector interconnectedness, to ensure the sector remains resilient under adverse market conditions.
