Pension funds and insurers in Europe are holding up well in spite of higher financial stability risks, according to a new report from the European Insurance and Occupational Pensions Authority (EIOPA) – but the body also said national supervisors need more data on liquidity and other risks to make sure buffer requirements are adequate.

Publishing its June 2023 Financial Stability Report today, Frankfurt-based EIOPA said the European economy was currently experiencing a new period of high uncertainty and elevated financial stability risk.

“Persistent inflation, the fraught geopolitical landscape and rising financing costs – also in the wake of the recent financial turmoil – pose challenges to growth prospects in Europe and the business conditions of financial institutions,” it said.

“Despite the challenging environment, insurers and pension funds have remained resilient,” the EU-wide regulator said, referring to the report, which it said took stock of the key developments and risks in the European insurance and occupational pensions sectors.

However, both insurers and occupational pension funds did carry “material direct exposures” to the banking sector with 13% and 6% of their respective total investments exposed, EIOPA said, while adding that this had been a steadily falling trend since the second quarter of 2019.

Regarding use by occupational pension funds and insurers of derivatives to hedge against interest-rate risk, EIOPA said its analysis showed insurers had enough liquid assets to cover potential margin calls resulting from a 100 basis point shift in the yield curve in either direction.

Petra Hielkema, chair of EIOPA said recent events in financial markets had shown once more that risks could either be slow burning – or could arise all of a sudden.

“Tensions around US regional banks and the liability-driven investment funds are examples of the latter,” she said.

Such sudden developments showed how essential it was, she said, for insurers and pension funds to have buffers and for supervisors to have the necessary data available.

Petra Hielkema at EIOPA

Petra Hielkema at EIOPA

“As we do not know which risks will actually materialise, a robust supervisory framework is key as are appropriate capital requirements,” said Hielkema.

She added: “To best contain the impact of adverse economic and market developments, supervisors need more data on liquidity risk and risks arising from the interconnectedness of financial markets.”

Reporting on the asset allocation of IORPs (Institutions for Occupational Retirement Provision), EIOPA revealed in its report that pension providers had shifted heavily out of investment funds over 2022 and into cash, which it said was striking.

Allocations to investment funds fell steeply to 42% from 51% over the year.

“This development is connected to the need to generate cash for their [IORPs’] margin accounts that provides collateral on their derivative positions,” EIOPA said.

The rise in interest rates in 2022 had resulted in losses on IORPs’ derivative positions – used by the pension funds to hedge their duration mismatches – with the net value of those positions falling to minus €69bn in the fourth quarter of 2022 from plus €57bn in the first quarter of that year, according to the report.

To meet margin calls, IORPs had sold liquid assets such as short-term debt securities, government bonds and equities, it said.

“As a consequence, the cash positions on the balance sheets of IORPs increased considerably,” EIOPA said.

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