National regulators should routinely monitor the liquidity risk exposures of the pension funds under their supervision, and assess their ability to manage these risks, European pension regulator European Insurance and Occupational Pensions Authority (EIOPA) announced in an opinion paper published yesterday.
EIOPA’s call for stakeholder feedback on the proposal follows a 2023 report in which it said national supervisors needed to gather more data on liquidity risks.
The pension regulator identified three possible sources of liquidity risks that warrant monitoring, including: margin and collateral calls on derivative positions; early withdrawals of accumulated pensions by plan members; and individual and collective transfers of accumulated pensions.
“The low incidence of supplementary regulation and supervisory measures at national level and heterogeneous supervisory practices may not prevent inadequate liquidity risk management by IORPs [Institutions for Occupational Retirement Provisions). As a result, IORPs may not be able to fulfil their financial obligations towards members and beneficiaries and other counterparties when they fall due,” according to EIOPA.
The pension regulator concluded from a survey it conducted among national regulators that pension funds in seven European Union member states are exposed to medium or high liquidity risk.
Three regulators indicated that these medium or high liquidity risk exposures relate to individual or collective pension transfers, while three others said they are linked to margin requirements on derivative instruments, mainly interest rates and currency hedges.
Based on data received from nine member states with more developed pension systems, an increase in interest rates of 1 percentage point would potentially require pension funds in these countries to fulfil margin calls of almost €67bn, whereas an appreciation of foreign currencies of 10% could lead to margin calls of €60bn.
“This loss would be predominantly located in the Netherlands due to the high degree of interest rate hedging and the large size of the country’s IORP sector,” EIOPA noted.
Italy and Netherlands
In no other country, do notional values of interest derivatives exceed 20% of IORPs’ assets. Derivatives exposures above this mark are considered by EIOPA as bearing high liquidity risk.
For foreign currency swaps, however, both Dutch and Italian pension funds are exposed to high liquidity risk because they invest relatively much in currencies other than the euro and have hedged most of this exposure.
Responding to EIOPA’s consultation paper, to which stakeholders can reply until 20 December, the Dutch pension regulator De Nederlandsche Bank (DNB) noted that liquidity risk is “an important risk for Dutch pension funds because of their material positions in derivatives.”
The regulator added liquidity risk is “a continuous issue of attention” for the supervisor, and that additional measures “are not necessary in the short term.”
The regulator published a list of good practices for liquidity risk management for pension funds in 2021. In 2025 it will publish an update of this document pending the outcomes of the current EIOPA consultation, a DNB spokesperson told IPE.
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