There is no need for additional action on liquidity risks at a European Union (EU) level and the use of policy recommendations from the Financial Stability Board (FSB) for non-bank participants risks adding further horizontal regulation for IORPs, PensionsEurope has warned.

In its response to the European Insurance and Occupational Pensions Authority’s (EIOPA) consultation on the supervision of liquidity risk management of IORPs', PensionsEurope does not agree that the draft opinion takes a comprehensive approach to the liquidity risk of IORPs.

It argues that IORPs are already required to address liquidity risks similarly to any other risks, as a result of the IORP II Directive, which introduced the prudent person principle in the management of IORPs, the Own-Risk Assessment (ORA) and the risk management key function.

Rather than implement the FSB policy recommendations, PensionsEurope believes that, given the diversity of IORPs in the member states, it would be feasible only to examine at the national level where additional requirements are necessary.

Furthermore, PensionsEurope also disagrees with the consultation’s definition of ‘liquidity risk’ and ‘material liquidity risks’. It believes that providing just two categories means that all IORPS would have significant liquidity risks.

“Since the LDI crisis in Great Britain, much attention has been given to potential liquidity risks of pension funds. However, supervisory authorities should be careful to find an adequate and proportionate approach to this issue. Only in very few countries, pension funds use derivatives to a significant amount. To provide only two categories ‘liquidity risks’ and ‘material liquidity risk’ would announce that all IORPs would have significant liquidity risks,” the association stated.

The response stated that in reality, many pension funds cannot face severe liquidity risk since members cannot cancel their membership or draw paid contributions to the scheme before they retire.

“Pension funds often have a clearly defined cash-out profile, for example, quarterly benefit payments. Therefore, liquidity risk stemming from benefit payments exists only during a very short time window.

“Moreover, the definitions of ‘liquidity risks’ are too broad. The main aspect of ‘risk’ is uncertainty. For a prudent long-term investor like a pension fund, there will always be profitable investments and other assets under management that cannot be realised at all times. However, the need for high excess liquidity will appear only during very rare events,” the association explained.

---