While Europe’s occupational pension sector remains broadly resilient, sharp market shocks could still trigger liquidity pressures from margin calls, according to the European Insurance and Occupational Pensions Authority’s (EIOPA) 2025 IORP stress test.

For the first time in its annual stress test of the sector, the supervisory authority undertook a pan-European exercise that focused on liquidity risks, which it described as “highly relevant in today’s tense and uncertain macroeconomic environment”.

It follows events seen in recent years, such as the 2022 UK gilt crisis and the 2023 US regional banking turmoil, which showed that certain events can create liquidity strains for segments of the financial sector when rates and risk premia rise sharply.

Liquidity strains, EIOPA explained, can also be triggered by adverse developments in the current geoeconomic and geopolitical tensions.

The exercise set out to explore the extent to which IORPs in the European Economic Area (EEA) could cope with similar shocks and where vulnerabilities would be the most pronounced.

In cooperation with the European Systemic Risk Board (ESRB), EIOPA developed two severe but plausible stress scenarios based on the prevailing sources of systemic risks identified for the EU financial system as of March 2025.

The scenarios were based on a yield curve up (YCU) and a yield curve down (YCD) shift of swap rates (+/- 100 bp) and included a consistent set of market shocks to all relevant asset classes, including a set of shocks to currency exchange rates.
Under the YCU scenario, interest rates rose rapidly and the euro fell in response to a sudden escalation of geopolitical tensions, bringing trade disruptions, high commodity prices and an upward revision of inflation expectations.

In the YCD scenario, interest rates dropped and the euro depreciated as markets abruptly priced in the effects of a protracted period of geopolitical tensions with low investment, weak demand and a worsening economic outlook for the region. Both scenarios triggered asset price corrections, higher volatility and a loss of confidence in financial markets.

The results showed that IORPs’ practices of hedging against a drop in interest rates and against a fall in the value of the euro via derivatives can “expose them to considerable liquidity risks”.

In particular, EIOPA said that the YCU scenario proved more challenging to IORPs, due to the combined effects of rising rates and euro depreciation, rather than the YCD scenario, where interest rates declined.

“The YCU scenario triggered substantial variation margin calls for IORPs as well as additional liquidity needs from market shocks. Although IORPs started the stress test from an aggregate liquidity position of around €74bn (referring to cash and cash-equivalent holdings), their post-stress results without management actions show an overall liquidity shortfall of 60bn – that is, €134bn lower than the baseline,” EIOPA said.

It added that post-stress test results left 68 of the 156 participating institutions with a negative liquidity position, meaning that they would have had to resort to asset sales to cover liquidity needs.

To learn how IORPs would respond to similar events in real life and assess potential spillovers, participating entities were allowed to apply reactive ‘management actions’ (e.g. sale of assets, reduction in trading activities or rebalancing of portfolios) to mitigate the impact of the shocks.

In a bid for even more realistic results, EIOPA introduced risk-sensitive liquidity haircuts to various asset classes to mirror the difficulty that liquidity-stretched IORPs face when selling into a downward market.

With management actions allowed, IORPs recovered their aggregate liquidity position into positive territory (€15bn), EIOPA said. Despite this, 27 entities still lacked sufficient cash to meet margin calls, which must be covered swiftly and, with some exceptions, in cash.

EIOPA noted that the results should be interpreted in light of the focused approach, which targeted only the asset side of the balance sheet of IORPs and of the severe but plausible set of shocks (e.g. haircuts).

The overall results of the stress test confirmed that the European occupational pensions sector, with investments in large and deep markets and diversified exposures to marketable securities, has sufficient liquidity buffers on aggregate to absorb shortfalls.

EIOPA noted that IORPs demonstrated both flexibility and expertise in managing liquidity challenges without creating material spillovers to other markets. Despite this, it said robust liquidity management processes “remain crucial”, especially for entities using derivatives.

Indeed, broader sustainability metrics covering liquid assets on top of cash and cash-equivalent holdings pointed to a resilient sector with solid aggregate liquidity buffers. The baseline’s €1.44trn in liquid assets dropped to €1.14trn without management actions and to €1.20trn with management actions, with no participants reporting negative sustainability indicators.

Commenting on the results, EIOPA chair, Petra Hielkema, said: “Our liquidity stress test of IORPs highlights 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.

“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.”

EIOPA noted that the test is not intended as a ‘pass or fail’ exercise, but said the findings provide a “valuable basis for follow-up dialogue” between supervisors and participating IORPs on the vulnerabilities identified.

The insights of the stress test will also support EIOPA in its work on the supervision of IORPs’ liquidity risk management.

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