The European Insurance and Occupational Pensions Authority (EIOPA) has published its latest Risk Dashboard, providing an overview of the health of European occupational pension funds, formally known as Institutions for Occupational Retirement Provision (IORPs). The results indicate a broadly stable risk landscape; however, significant concerns about market risks persist amid continued volatility and vulnerabilities in the real estate market.
The report reveals that IORPs’ exposure to market and asset return risks remains elevated due to persistent market fluctuations. The macroeconomic landscape presents medium-level risks, with projected GDP growth in major geographies showing positive trends but still below historical averages. This moderate outlook reflects the complexities and uncertainties facing European economies as they embark on the path to recovery.
Credit risks are stable at an average level; however, an increase in credit default swap (CDS) spreads for corporate bonds was observed at the end of June 2024. In contrast, government bond spreads remained largely constant, suggesting a differentiated risk environment between corporate and sovereign debt.
High levels of volatility were observed in fixed income and equity markets, with the report highlighting a notable decline in property prices across the euro area. This decline is mainly attributed to the difficulties in the commercial real estate sector, which remains a major concern for pension funds reliant on the consistent performance of their assets. However, there is a silver lining; recent annual data shows a rebound in IORP portfolio performance for 2023, mainly driven by positive market returns.
The reserve and funding risks of defined benefit IORPs are assessed as unchanged at a medium level. The financial robustness of these funds continues to be supported by the increase in interest rates from the first quarter of 2024. In addition, concentration risks have decreased compared to the previous quarter, reflecting a more diversified investment portfolio among IORPs. In particular, the median exposure of IORPs to banking and non-banking financial activities has increased slightly.
Additionally, all other risk categories are currently assessed at medium levels, but there is growing concern related to digitalisation and cyber risks. The report indicates a potential increase in these risks over the next 12 months, highlighting the need for IRPs to strengthen their cybersecurity measures as they adapt to an increasingly digital landscape.
The EIOPA Risk Dashboard provides a comprehensive overview of vulnerabilities within the European Economic Area (EEA) IORP sector, based on regulatory reporting from 625 IORPs. It encompasses both defined contribution (DC) and defined benefit (DB) schemes, providing a nuanced view of the financial health and risks facing these pension schemes.
As Europe grapples with the dual pressures of economic recovery and market volatility, EIOPA’s reflections are a timely reminder of the complexities impacting occupational pension provision. While the current risk assessment leans towards stability, the risks identified highlight the need for vigilance and proactive management within the IORP sector to protect the retirement savings of millions of people around the world. Europe.
Originally published in The European Times.
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