EIOPA issues Opinion to enhance the supervision of occupational pension funds’ liquidity risk management

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The European Insurance and Occupational Pensions Authority (EIOPA) issued today an Opinion on the supervision of liquidity risk management of Institutions for Occupational Retirement Provision (IORPs). The expectations presented in the Opinion aim to enhance the monitoring, assessment and management of liquidity risks, with a view to further strengthening the stability of IORPs and the wider financial system and improving the protection of pension fund members and beneficiaries.

Liquidity risks for IORPs can arise from a sudden decline in cash inflows, such as contributions and investment income, or an increase in cash outflows, like early withdrawals by plan members. A particular source of liquidity risk are margin and collateral calls on derivatives. IORPs may use derivative instruments to reduce their exposure to interest rate and foreign currency risks. However, these hedging positions also expose IORPs to rapid changes in interest and/or foreign exchange rates in the opposite direction, triggering margin calls to cover losses.

Proper liquidity risk management is essential to ensure that IORPs have adequate liquidity to fulfil their financial obligations to members and beneficiaries, most notably benefit payments, and other counterparties when they fall due. The absence of readily available and diverse liquid assets may force pension funds into selling assets at steep discounts to raise cash. Such fire sales may have spillover effects to financial markets and other financial institutions. 

The Opinion aims to enhance the supervision of liquidity risk management by IORPs. It sets expectations to national supervisors to monitor and assess the liquidity risk exposures of IORPs as well as their ability to manage these risks. Supervisors should also require IORPs with material liquidity risk exposures to integrate liquidity risk into their overall risk management system. As such, IORPs should stress test incoming and outgoing cash flows and establish sufficient buffers of liquid assets to cover unforeseen liquidity shortfalls.

There is considerable heterogeneity among IORPs and their liquidity risk exposures across different Member States. Recognising this heterogeneity, EIOPA expects supervisors to apply the expectations in the Opinion in a risk-based and proportionate manner.

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Opinion on the supervision of liquidity risk management of Institutions for Occupational Retirement Provision (IORPs)

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https://www.eiopa.europa.eu/publications/opinion-supervision-liquidity-risk-management-institutions-occupational-retirement-provision-iorps_en

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Opinion on the supervision of liquidity risk management of Institutions for Occupational Retirement Provision (IORPs)

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