Pension funds should not be treated as non-bank financial intermediaries (NBFIs) given their social role and how they are regulated, PensionsEurope has told the European Commission.
In a consultation, the European Commission recently asked for stakeholders’ views on financial stability concerns about non-bank financial intermediation (NBFI) to inform the European Union executive’s macroprudential stance on the issue.
It said NBFI comprises very diverse financial sectors, naming pension funds as one type alongside asset managers and insurance companies.
In its response to the consultation, PensionsEurope said IORPs have limited connections with other financial institutions and their ability to trigger systemic risks is very small.
Citing an assessment by the European Insurance and Occupational Pensions Authority (EIOPA) following its 2015 IORP stress test, PensionsEurope said pension funds provided stability rather than instability to the financial system.
It said the insolvency of pension funds is “an improbable event” and that even though a technical default due to the inability to meet short-term obligations was less unlikely than insolvency, the kinds of harm that could follow had “a very low likelihood of occurring given the fact that EU IORPs, in contrast with the UK ones, invest much more in different markets”.
Adequate risk management
PensionsEurope also said the risk management and governance of pension funds were adequate to deal with any potential liquidity risk, with regular liquidity risk assessments relating to derivative portfolios already part of the treasury function and risk management processes for IORPs.
It acknowledged the importance of this in light of the UK liability-driven investment (LDI) crisis, but repeated its argument that there are fundamental differences between the UK and European pension funds, such as that the level of interest rate hedging is lower, so that even under extreme circumstances the EU was very unlikely to face a crisis with the same systemic relevance.
In its consultation, the European Commission had asked how reporting by pension funds could be improved to refine the supervision of liquidity risks while minimising the reporting burden, and what could be done to ensure the ability to measure the impact of unexpected margin calls.
EIOPA has proposed stricter liquidity risk management for pension funds, with the CEO of Bayer Pensionskasse responding by rejecting a blanket EU-level approach to dealing with liquidity risks.
Feedback to the NBFI consultation will inform the Commission’s thinking about potential new policy initiatives for the new five-year political cycle.
PensionsEurope said it was “concerned by the horizontal approach of regulations which concern NBFIs as they are not adequate to address the specificities of IORPs”. The association has already said that horizontal regulations like the Digital Operational Resilience Act (DORA) and the Sustainable Finance Disclosures Regulation (SFDR) are triggering huge efforts and costs for pension funds.
UK pension funds ‘significantly improved resilience’
UK defined benefit pension funds are now more resilient to extreme market movements, according to a system-wide stress test by the Bank of England.
The System-Wide Exploratory Scenario (SWES), said to be the first such exercise globally, explored how the UK financial system would respond to a market shock. In a departure from other types of system-wide analyses by central banks, it involved the active engagement of around 50 different financial firms, including banks, insurers and pension schemes.
According to the central bank, the SWES showed that “the dynamics of LDI have changed considerably” since the 2022 LDI crisis, with both financial and operational resilience of the sector improving.
The Pension Regulator (TPR) played a key role in analysing the results of the SWES, particularly in relation to the impact on LDI and the collateralisation processes of such investments. It said the exercise showed pension funds had significantly improved their resilience with respect to LDI over the past two years.
“We recognise the important role pensions play in the wider financial eco-system and continue to guard against systemic risks by understanding how schemes act during stressed market conditions, as well as exploring improvements to our data collection to make sure we keep savers safe,” said Nausicaa Delfas, TPR’s chief executive.
The latest digital edition of IPE’s magazine is now available
No comments yet