European pension funds and insurers have remained resilient despite the challenging geopolitical and financial landscape, according to the European Insurance and Occupational Pensions Association (EIOPA).

The association has published its June 2023 Financial Stability Report, which takes stock of the key developments and risks in the European insurance and occupational pensions sectors.

EIOPA stated that the European economy was currently experiencing a new period of high uncertainty and elevated financial stability risk, warning that persistent inflation, the fraught geopolitical landscape and rising financial costs in the wake of recent financial turmoil pose challenges to growth prospects in Europe and the business conditions of financial institutions.

As interest rates rose, it became increasingly important for IORPs to hold sufficient liquidity to meet margin calls on their interest rate derivatives positions, EIOPA noted.

While this affected IORPs in the UK especially, it had consequences for European Economic Area IORPs too.

Furthermore, IORPs experienced losses on their equity portfolios as stock prices were lower at the end of 2022 than the previous year.

The banking turmoil experienced at the beginning of 2023 had a “mainly negative” effect on IORPs’ assets, while the consequences for liabilities were “mixed” and largely dependent on the type of pension scheme.

IORPs’ total assets fell by €362bn to €2,378bn during 2022, while liabilities also declined.

Overall, the value of the technical provisions fell from €2,327bn to €2,033bn during the year.

EIOPA noted that Europeans were still not saving enough for retirement and women were particularly at risk.

Defined benefit (DB) IORPs were found to have seen their already strong funding positions increase further, with the funding ratio estimated to have improved from 118 per cent to 120 per cent in 2022.

Asset allocations were found to differ “substantially” between DB and defined contribution (DC) IORPs: Bonds represented 45 per cent of DB IORP assets, while for DC IORPs they represented 29 per cent of assets, and DB IORPs had a 34 per cent allocation to equities compared to 40 per cent for DC IORPs.

DC IORPs were found to have a larger allocation to property and other investments.

“Recent events in financial markets have once again demonstrated that risks can either be 'slow burning' or can arise all of a sudden,” commented EIOPA chair, Petra Hielkema.

“Tensions around US regional banks and the liability-driven investment funds are examples of the latter. Such abrupt developments show how essential it is for insurers and pension funds to have buffers in place and for supervisors to have the necessary data available.

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

“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.”

Share Story: