Institutions for occupational retirement
provision (IORPs)
Risk Dashboard
EIOPA-BoS-24-416
October 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.
October 2024 IORP Risk Dashboard
The reference date for IORP data is Q2-2024 for quarterly indicators and 2023-YE for annual indicators. The cut-off date for indicators based on data from external sources is end-September 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 20 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 the inflation forecasts showing a decline compared to the previous quarter. Accordingly, the average inflation forecasts for the 4 quarters ahead dropped to 2.1% in the third quarter of 2024 (2.4% in the previous quarter). Similarly, the weighted average of the 10-year swap rates for major currencies shifted downwards (2.6% in the third quarter of 2024), reversing the upward trend observed in the previous quarters (3.1% in the second quarter of 2024). The average forecasted GDP growth across main geographical areas remained stable at 1.5% in the same period, after the increasing trend observed since end-2022 . Unemployment rates (weighted average across major geographical areas) slightly increased to 5.1% in the second quarter of 2024 (5.0% in the previous quarter), while Euro area wage growth declined to 4.7% (5.1% in the previous quarter).
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. Credit default swaps (CDS) spreads for corporate bonds declined (56 bps from 61 bps), while for government bonds remained overall stable (9.8 bps) at end-September 2024 when compared to June. The median exposure of IORPs towards sovereign and corporate bonds (excluding exposures via collective investment undertakings) as a share of total assets remained stable, standing at 14.4% and 3.0%, respectively, in the second quarter of 2024. IORPs’ investments in loans and mortgages are limited, with the household debt-to-income ratio for the euro area decreasing by 2 p.p. to 86% based on the latest available data (Q1-2024). 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 more negative in the first quarter of 2024. In terms of credit quality, the median average CQS of IORPs’ investments was 1.6 in the second 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), though when considering the weighted average for the sector the figure increases (5.4%), indicating higher exposures for larger IORPs.
Source: EIOPA Occupational Pensions Regulatory Reporting
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 in bond markets receding at end-September, but still high by historical standards. The volatility in the equity markets as measured by the VSTOXX index remained broadly stable. In terms of investments, the median exposure to bonds and equity as a share of total assets (including exposures to collective investment undertakings (CIUs) investing in bonds and equity) are also largely unchanged at 55% and 27%, respectively, in the second quarter of 2024. Real estate prices continued to decline across the Euro Area although to a lower pace than last quarter (-7.5% in the last quarter of 2023 from -8.2% in the previous quarter), 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 second 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 26.6%. The median duration of IORPs’ assets is overall stable standing slightly above 5 years (weighted average for the sector slightly above 7 years).
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 market value of IORPs’ derivatives positions remained negative and close to 0%, whereas the weighted average declined to -3.4% of total assets in the second quarter of 2024 (-2.7% in the previous quarter). 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 second quarter of 2024.
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 defined benefit (DB) schemes remain at medium level. Financial positions of DB IORPs’ improved due to the higher interest rates in the second quarter of 2024. 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 to 21.1% in the second quarter of 2024 (19.0% in the previous quarter). The median funding ratio, calculated as assets over technical provisions, showed a similar pattern, increasing to 122.9% (120.8% in the first quarter of 2024). The median of life expectancy for both newborn persons and 65 year old persons in the EEA increased in 2023, standing at 82 and 20. The lower tails of the distributions also improved with respect to the 2022 levels.
Source: EIOPA Occupational Pensions Regulatory Reporting
Source: Eurostat
Source: Eurostat
Concentration risks
Concentration risks are at medium level. IORPs’ median exposure to domestic sovereign debt slightly increased, reaching 1.2% of total assets in the second quarter of 2024 (1% in the previous quarter). Exposure to banks and financial activities other than banking remained overall stable at 1.3% and 3.5% of total assets, respectively, in the same quarter. The weighted averages for both indicators remained unchanged at 5.2% and 9.5%, respectively, pointing to higher exposures for larger IORPs. The portfolio concentration per asset class, sector and country, measured by the Herfindahl Hirschman index, remained broadly unchanged compared to the previous quarter. 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.
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 continued increasing in the third quarter of 2024, reaching the highest level in the last years. This development could be driven by the on-going geopolitical tensions and related uncertainty. In terms of expected developments over the next year, this is the only category to display an increasing trend.
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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