The European Insurance and Occupational Pensions Authority (EIOPA) has issued an opinion on the supervision of liquidity risk management of Institutions for Occupational Retirement Provision (IORPs), aimed at enhancing the supervision of liquidity risk management by IORPs.

The opinion, which follows a consultation on its draft opinion, sets out expectations for national supervisors to monitor and assess the liquidity risk exposures of IORPs as well as their ability to manage these risks. 

Additionally, the opinion suggested that supervisors should require IORPs with material liquidity risk exposures to incorporate liquidity risk into their risk management systems.

Therefore, EIOPA said IORPs should stress test incoming and outgoing cash flows and establish "sufficient" buffers of liquid assets to cover unexpected liquidity shortfalls.

EIOPA explained that liquidity risks for IORPs can come from a sudden decline in cash inflows, such as contributions and investment income, or an increase in cash outflows, such as early withdrawals by plan members.

It identified that margin and collateral calls on derivatives were a particular source of liquidity risk.

The authority said that IORPs may use derivatives to reduce their exposure to interest rates and foreign currency risks.

However, if rates or exchange rates suddenly move the other way, these positions can lead to losses and force IORPs to quickly provide extra funds to cover them.

Given this, it said that proper liquidity risk management is “essential” to ensure that IORPs have adequate liquidity to fulfil their financial obligations to members and beneficiaries, particularly benefit payments, and other counterparties when they fall due.

EIOPA suggested that the absence of diverse and readily available liquid assets could force pension funds to sell assets at high discounts to raise cash, which could have knock-on effects on financial markets and other financial institutions. 

The authority said there is considerable heterogeneity among IORPs and their liquidity risk exposures across different member states.

Recognising this heterogeneity, EIOPA expects supervisors to apply the expectations in the opinion in a risk-based and proportionate manner.

The opinion also revealed that while member states may supplement the IORP II Directive through national regulation or supervisory measures, EIOPA’s survey showed that only a small minority of member states impose more specific requirements on liquidity risk management of IORPs.

It highlighted that, although most competent authorities address liquidity risk as part of the supervisory review process, their approaches to assessing IORPs’ exposure to liquidity risk and the IORPs’ ability to manage it vary markedly.

The survey also found that even though margin calls on derivatives are an important source of liquidity risk, more than a third of competent authorities do not collect relevant derivative data from IORPs.

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