The European Insurance and Occupational Pensions Authority’s (EIOPA) 2025 stress test of the European occupational pension funds confirms that the sector has sufficient liquidity buffers on aggregate to absorb shortfalls, the Frankfurt-based European supervisory authority has said.
It said that IORPs demonstrated both flexibility and expertise in managing liquidity challenges without creating material spillovers to other markets.
However, robust liquidity management processes remain crucial, especially for entities using derivatives, it cautioned.
Launched in April, the stress test is EIOPA’s first such exercise to focus on liquidity risk, following recent episodes of financial stress, such as the 2022 UK Gilt crisis and the 2023 US regional banking turmoil. It was an asset-only exercise that used two scenarios, a ‘yield curve up’ scenario with rapidly increasing interest rates and a ‘yield curve down’ scenario.
‘Effective liquidity management actions’
As at the end of December 2024, in the yield curve up scenario, the aggregate liquidity position of IORPs fell from a baseline of €74bn to a shortfall of €60bn, but improved to €15bn following so-called management actions, such as asset sales.
Twenty-seven pension funds still lacked sufficient cash to meet margin calls but taking into account liquid assets beyond cash and cash-equivalent holdings the sector was resilient, with solid aggregate liquidity buffers, EIOPA said.
Under the yield curve down scenario, the liquidity position stayed positive, moving from €74bn at baseline to €56bn under stress, and further improving to €70bn after management actions.
Petra Hielkema, chair of EIOPA, said the liquidity stress test highlighted two important points.
“First, it confirms that the increased focus on liquidity risks by industry participants and supervisors in recent years is strengthening the sector’s preparedness,” she said.
“Second, it shows that Europe’s occupational pension sector is generally well placed to withstand periods of liquidity strains that might lead to more turbulence in smaller, less diversified or more derivatives-heavy markets.
“That said, we will continue to closely monitor liquidity risks in the sector, particularly as allocations to illiquid assets — such as private credit, real estate and long-term infrastructure — keep rising.”
In a joint statement with the European Association of Paritarian Institutions (AEIP), Matti Leppälä, secretary general of PensionsEurope, said the results of the 2025 stress test demonstrated the robustness of European Economic Area pension funds in navigating uncertain geopolitical environments.
“While the two scenarios tested the liquidity position of IORPs in stressed situations, the ability of IORPs to implement effective management actions underscores their commitment to safeguarding the long-term interests of pension beneficiaries,” he said.
“The availability of a sufficient cash reserve and adequate management actions is also crucial in ensuring that IORPs can withstand the simulated shocks simulating adverse economic developments.’’
Simone Miotto, executive director of AEIP, said the stress test showed that the current risk management framework for IORPs was fit for purpose “as EEA IORPs do not have any liquidity weaknesses, and have a wide range of resources, tools, and expertise to address any adverse market conditions, while continuing to deliver adequate retirement income to their members and beneficiaries”.
Miotto also praised EIOPA’s use of an asset-only methodology, saying it was more appropriate for a comprehensive and comparable analysis of all IORPs, irrespective of whether they offer defined benefit (DB) or defined contribution (DC) pension schemes.
“Given the increasing shift towards DC pensions, AEIP encourages EIOPA to continue using this approach in future stress test exercises for IORPs,” he said.
The next EIOPA IORP stress test will take place in 2028. It will be the first under a new executive director at EIOPA, with Fausto Parente stepping down next April after two terms in the role. He will be succeeded by Damian Jaworski, whose appointment was confirmed by the European Parliament yesterday.
The sample of pension funds participating in the 2025 liquidity stress test was defined by EIOPA in cooperation with national supervisors. It comprised 156 pension funds from 18 Member States: Austria, Belgium, Cyprus, Germany, Denmark, Spain, Finland, France, Ireland, Italy, Liechtenstein, Luxembourg, the Netherlands, Norway, Portugal, Sweden, Slovenia and Slovakia.
The selected sample covered more than 60% of assets in DB schemes and DC schemes.
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