Institutions for occupational retirement
provision (IORPs)
Risk Dashboard
EIOPA-BoS-24-278
July 2024
This risk dashboard, based on individual occupational pensions regulatory reporting, summarises the main risks and vulnerabilities in the European Economic Area (EEA) Institutions for Occupational Retirement Provision (IORPs) sector for the different schemes, i.e. defined contributions (DC) and defined benefits (DB), through a set of risk indicators. It should be noted that depending on the characteristics of the pension scheme, risks might not ultimately be born by the IORPs themselves but by their members and beneficiaries or their sponsors.
The risk dashboard shows for each risk indicator the distribution of the individual reported data over time together with the weighted average, capturing the relative importance of the different entities for the sector. For specific indicators, this information is complemented by relevant data from external sources.
July 2024 IORP Risk Dashboard
The reference date for IORP data is Q1-2024 for quarterly indicators and 2023-YE for annual indicators. The cut-off date for indicators based on data from external sources is end-June 2024. The Level (colour) corresponds to the level of risk as of the reference date, the Trend is displayed for the 3 months preceding the reference date and the Outlook is displayed for the 12 months after the reference date. The latter is based on the responses received from 17 national competent authorities (NCAs) and ranked according to the expected change in the materiality of each risk (substantial decrease, decrease, unchanged, increase and substantial increase). More details can be found in the appendix.
Key Observations
Macro risks
Macro-related risks are at a medium level with forecasted GDP growth showing positive developments. The average forecasted GDP growth across main geographical areas continued increasing since end-2023, reaching 1.5% in the second quarter of 2024 (1.2% in the previous quarter), still relatively low by historical standards. The increasing trend is mainly driven by upward revisions for GDP growth in the BRICs region. The weighted average of the 10 year swap rates for major currencies shifted upwards (3.1% in the second quarter of 2024), continuing the increasing trend observed in the previous quarter (2.9%). Euro area wage growth increased to 5.1% in the first quarter of 2024 (3.4% in the previous quarter). Average inflation forecasts for the 4 quarters ahead remained stable at 2.4% in the second quarter of 2024. Similarly, unemployment rates (weighted average across major geographical areas) are stable compared to the previous quarter, standing at 5% in Q1-2024.
Source: Bloomberg Finance L.P.
Source: Refinitiv and Office for National Statistics (ONS) UK
Source: Refinitiv
Source: Bloomberg Finance L.P.
Credit risks
Credit risks remain at medium level. The median exposure of IORPs towards sovereign bonds as a share of total assets slightly increased, standing at 14.3% in the first quarter of 2024 (13.2% in the previous quarter), while CDS spreads for that asset category remained broadly stable (at 11 bps at end-June). IORPs’ median exposure to corporate bonds as a share of total assets remained at around 3% in the first quarter of 2024, while the corresponding CDS spreads increased to 61 bps at end-June (54 bps in the previous quarter). When considering investments via collective investment undertakings (annual data available for 2023), the median exposure of IORPs towards sovereign and corporate bonds increases to 23.3% and 15.8%, respectively. IORPs’ investments in loans and mortgages are limited, with the bulk of the distribution standing below 1.5% of total assets. The correlation between the debt-service ratio of non-financial corporations and non-financial corporate bond spreads, aimed at capturing potential credit risk mispricing, became less negative in the fourth quarter of 2023. In terms of credit quality, IORPs’ investments have on average a CQS of 1.6 (median in the first quarter of 2024), corresponding to an S&P rating between AA and A. The median exposure of IORPs to below investment grade assets (with a CQS higher than 3) is low (0% of total assets in the first quarter of 2024), though when considering the weighted average the figure increases (5.4%), indicating higher exposures for larger IORPs.
Source: EIOPA Occupational Pensions Regulatory Reporting and Bloomberg
Source: EIOPA Occupational Pensions Regulatory Reporting
Source: EIOPA Occupational Pensions Regulatory Reporting and Bloomberg
Source: EIOPA Occupational Pensions Regulatory Reporting
Source: EIOPA Occupational Pensions Regulatory Reporting and ECB
Source: BIS database for debt service ratios for the private non-financial sector and Bloomberg, LECFOAS Index
Market & asset return risks
Market and asset return risks are stable at a high level with volatility increasing in the fixed income and equity markets at end-June. The median exposure of IORPs towards equity as a share of total assets is broadly stable at 26% in the first quarter of 2024 (including exposures to collective investment undertakings (CIUs) investing in equity), while the median exposure to bonds (including CIUs investing in bonds) is also largely unchanged at 55%. Real estate prices continued to decline across the Euro Area (-8% in the last quarter of 2023), mainly driven by commercial property prices. The median exposure of IORPs towards property as a share of total assets is limited (below 1% in the first quarter of 2024), though the figure is higher when considering the weighted average for the sector (6%). This indicates higher exposures for larger IORPs. Also, exposures to assets denominated in foreign currency seem to be higher for larger IORPs, with the median exposure at 1.6% of total assets and the weighted average at 26.3%. The median duration of IORPs’ assets is overall stable standing slightly above 5 years (weighted average for the sector slightly above 7 years). In terms of asset return risks, IORPs’ portfolio performance, measured as investment income including unrealised gains and losses as a share of total assets, rebounded in 2023, after the negative returns experienced during 2022 (median at 8%, compared to -12% in 2022). Costs, calculated as the sum of administrative, investment and other expenses over total assets remained broadly stable in 2023 (median at 0.51% compared to 0.55% in the previous year).
Source: EIOPA Occupational Pensions Regulatory Reporting and Bloomberg
Source: EIOPA Occupational Pensions Regulatory Reporting and Bloomberg
Source: EIOPA Occupational Pensions Regulatory Reporting and ECB
Source: EIOPA Occupational Pensions Regulatory Reporting
Source: EIOPA Occupational Pensions Regulatory Reporting
Liquidity risks
Liquidity risks are at medium level. The median net asset value of IORPs’ derivatives positions remained close to zero in the first quarter of 2024, while the weighted average for the sector slightly declined to -2.7% of total assets. This indicator and the indicator on cash holdings tend to mirror each other and therefore, grossly, balance out, in particular for the largest IORPs. The median value of the liquid assets ratio remained unchanged at around 52% in the first quarter of 2024. The median value for the (annual) liquidity indicator measuring inflows (contributions) as a share of outflows (mainly benefit payments) remained overall stable at 110% in 2023. The weighted average for this indicator dropped to 128% (179% in 2022), still pointing to a more comfortable cash flow position for large IORPs. The indicator on the sustainability of the cash flow position (annual), which compares net premium contributions and benefit payments to liquid assets, is positive for most of the distribution and also considering the weighted average for the sector.
Source: EIOPA Occupational Pensions Regulatory Reporting
Source: EIOPA Occupational Pensions Regulatory Reporting
Source: EIOPA Occupational Pensions Regulatory Reporting
Reserve & funding risks
Reserve & funding risks (for DB schemes) remain at medium level. Financial positions of DB IORPs’ improved slightly due to the higher interest rates at the beginning of 2024 in comparison with the levels in the last quarter of 2023. Given the longer duration of IORPs’ technical provisions, higher rates lowered the value of their liabilities to a larger extent than their assets. The median excess of assets over liabilities improved slightly to 19% in the first quarter of 2024 (17.4% in the previous quarter). The median funding ratio, calculated as assets over technical provisions, showed a similar pattern, increasing to 120.8% (118.7% in the fourth quarter of 2023).
Source: EIOPA Occupational Pensions Regulatory Reporting
Source: Eurostat
Source: Eurostat
Concentration risks
Concentration risks are at medium level, with a decreasing trend given by a lower sectorial and geographical concentration in IORPs’ portfolio in the first quarter of 2024, as measured by the Herfindahl Hirschman index. While the median value for these concentration measures remained stable at 51% and 23%, respectively, the weighted averages for the sector slightly declined. Concentration across asset categories remained stable at 55%. These measures are calculated excluding investments via collective investment undertakings (CIUs), therefore showing high levels of concentration for those IORPs investing mainly via this asset class. IORPs’ median exposure to other sectors such as banking and financial institutions other than banks slightly increased, standing at 1.4% and 3.6% of total assets in the first quater of 2024 (1.1% and 3.2% in the previous quarter). The median exposure to domestic sovereign debt slightly increased, reaching 1% of total assets in the first quarter of 2024 (0.7% in the previous quarter).
Source: EIOPA Occupational Pensions Regulatory Reporting
Source: EIOPA Occupational Pensions Regulatory Reporting
Source: EIOPA Occupational Pensions Regulatory Reporting
Source: EIOPA Occupational Pensions Regulatory Reporting
Source: EIOPA Occupational Pensions Regulatory Reporting
Source: EIOPA Occupational Pensions Regulatory Reporting
Digitalisation & cyber risks
Digitalisation and cyber risks are stable at medium level. The materiality of these risks for IORPs as assessed by supervisors slightly increased in the second quarter of 2024, reaching the highest level in the last years. In terms of expected developments over the next year, this is the only category in the risk dashboard to display an increasing trend. Cyber security remained as a main concern.
Source: EIOPA’s Pension Bottom-up Survey
APPENDIX
Arrows for the Trend show changes for the 3 months preceding the reference date, while arrows for the Outlook show expected developments for the next 12 months.
Macro risks
This category depicts developments in the macro-economic environment that could impact the IORP sector. This category is based on publicly available data on macro variables that may be used for broader macroprudential monitoring and analysis.
Credit risks
The category assesses the vulnerability of the IORP sector towards credit risks. To achieve this aim, credit-relevant asset class exposures of the IORPs are combined with the relevant risk metrics applicable to these asset classes.
Market & asset return risks
The risk category depicts the main risks IORPs are exposed to on financial markets and the level of asset returns and costs (e.g. administrative, investments and other). For most asset classes these risks are being assessed by analysing both the investment exposure of the IORP sector and an underlying risk metric. The exposures give a picture of the vulnerability of the sector to adverse developments; the risk metric, usually the volatility of the yields of the associated indices, gives a picture of the current level of riskiness.
Liquidity risks
Liquidity risk can be defined as the risk that an institution will not be able to meet its payment obligations timely or without generating excessive cost.
Reserve & funding risks
This category aims to assess the level of the own funds of IORPs and the robustness of its technical provisions. This risk category is only relevant for IORPs executing defined benefit pension schemes (DB).
Concentration risks
This section assesses different concentration risks IORPs are exposed to via their portfolio investments. It depicts various concentration types.
Digitalisation & cyber risks
The category aims at monitoring potential financial stability risks
related to an increased digitalisation, which exposes the IORP sector to
risks from a digital operational resilience perspective (i.e. cyber
security risks).
Due to limited data availability, only environmental risks are currently considered in the category. As more data will be available, social and governance risks should be also considered.↩︎
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