Institutions for occupational retirement provision (IORPs)
Risk Dashboard

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This risk dashboard, based on individual occupational pensions regulatory reporting, summarises the main risks and vulnerabilities in the 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.

February 2024 IORP Risk Dashboard

The reference date for IORP data is Q3-2023 for quarterly indicators and 2022-YE for annual indicators. The cut-off date for indicators based on data from external sources is end-December 2023. 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 21 national competent authorities (NCAs) and ranked accordingly 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 now at medium level and show a stable trend, with positive developments related to the indicator on average inflation forecasts for the 4 quarters ahead which slighly decreased to 2.5% (2.9% in the previous quarter), below the levels reached during 2022. The indicator on average forecasted GDP growth for the 4 quarters ahead is standing at 0.8% in the fourth quarter of 2023 after 0.7% in the previous quarter. Upward revisions for US and CH GDP growth more than compensated downward revisions for BRICS, UK and EU, when considering IORPs investment exposures. Euro area wage growth increased to 5.3% in the third quarter of 2023 (4.5% in the previous quarter). The weighted average of the 10 year swap rates for major currencies moved downwards due to decreasing rates across all currencies, standing at 2.7% in the fourth quarter of 2023 (3.6% in the previous quarter). Unemployment rates (weighted average across major geographical areas) are stable compared to the previous quarter, standing at 5%.

Note: Average of forecasts four quarters ahead, weighted average for Euro area, United Kingdom, Switzerland, United States and BRICS based on EEA IORPs’ investment exposures.
Source: Bloomberg Finance L.P.

Note: Weighted average for EU, Switzerland, United States and China based on EEA IORPs’ investment exposures.
Source: Refinitiv and ONS UK

Note: Weighted average for EUR, GBP, CHF and USD based on EEA IORPs’ investment exposures.
Source: Refinitiv

Source: Eurostat: EA Labour Cost Index (LCI)

Note: Average of forecasts four quarters ahead, weighted average for Euro area, United Kingdom, Switzerland, United States and BRICS based on EEA IORPs’ investment exposures.
Source: Bloomberg Finance L.P.

Credit risks

Credit risks are at medium level. The CDS spreads for corporate and sovereign bonds, which are the largest investment categories for IORPs, slightly receded in the fourth quarter of 2023. The median exposure of IORPs towards sovereign and corporate bonds as a share of total assets was at 13% and 3.2%, respectively, in the third quarter of 2023 (21% and 15.6% when considering exposures via collective investment undertakings based on annual data). IORPs’ investments in loans and mortgages are limited, with both the median and weighted average standing below 1.5%. IORPs’ investments have on average a CQS of 1.6 (median in the third quarter of 2023), 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% in the third quarter of 2023), though when considering the weighted average the figure increases (5.7%), indicating higher exposures for larger IORPs. 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 second quarter of 2023.

Note: Left scale shows the distribution of exposures excl. collective investment undertakings (inter-quartile range and median), right scale the risk measure
Source: EIOPA Occupational Pensions Regulatory Reporting and Bloomberg

Note: Left scale shows the distribution of exposures excl. collective investment undertakings (inter-quartile range and median), right scale the risk measure
Source: EIOPA Occupational Pensions Regulatory Reporting and Bloomberg

Note: Left scale shows the distribution of exposures excl. collective investment undertakings (inter-quartile range and median), right scale the risk measure of EA. This indicator is only relevant for some jurisdictions
Source: EIOPA Occupational Pensions Regulatory Reporting and ECB

Source: EIOPA Occupational Pensions Regulatory Reporting

Note: The indicator includes exposures via collective investment undertakings, i.e. look-through is applied.
Source: EIOPA Occupational Pensions Regulatory Reporting and Bloomberg

Note: The indicator includes exposures via collective investment undertakings, i.e. look-through is applied.
Source: EIOPA Occupational Pensions Regulatory Reporting and Bloomberg

Source: EIOPA Occupational Pensions Regulatory Reporting

Note: Weighted average of Debt-service ratio NFCs for Germany, Spain, France, Italy, Netherlands, United Kingdom and United States based on EEA IORPs’ investment exposures. Correlation between the debt-service ratio of non-financial corporates and the spread of non-financial corporate bonds based on a 12-quarter rolling window
Source: BIS: Debt-service ratio NFCs and Bloomberg: LECFOAS Index

Market & asset return risks

Market and asset return risks are stable at a high level due to the still high volatility in bond markets, whereas volatility in equity markets as measured by the VSTOXX index slightly decreased. The median exposure of IORPs towards equity as a share of total assets was at around 25% in the third quarter of 2023 (including exposures to collective investment undertakings investing in equity). The latest available data shows a 4% decline in real estate prices in the first quarter of 2023 when compared to the same quarter of the previous year mainly driven by commercial property prices. The median exposure of IORPs towards property as a share of total assets is limited (1% of total assets in the third quarter of 2023), though the figure is higher when considering the weighted average. 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 2.1% and the weighted average at 25.3%. Duration of the IORPs’ assets is overall stable standing slightly above 5 years. Geopolitical turmoil in 2022, mainly caused by the Russian invasion of Ukraine, combined with the monetary tightening by central banks, raised asset returns risks, with IORPs’ experiencing negative returns on their portfolio investments. Costs, calculated as the sum of administrative, investment and other expenses over total assets showed some stability, with the median value slightly shifted up (0.55% from 0.47%) and the weighted average slightly moved down (from 0.66% to 0.6%). This suggests that costs for relatively large IORPs dropped, but for relatively small IORPs moved up.

Note: Left scale shows the distribution of exposures incl. collective investment undertakings investing in equity (inter-quartile range and median), right scale the risk measure
Source: EIOPA Occupational Pensions Regulatory Reporting and Bloomberg

Note: Left scale shows the distribution of exposures incl. collective investment undertakings investing in real estate (inter-quartile range and median), right scale the risk measure. The growth of real estate prices is based on a weighted average of commercial and residential real estate prices
Source: EIOPA Occupational Pensions Regulatory Reporting and ECB

Source: EIOPA Occupational Pensions Regulatory Reporting

Note: Left scale shows the distribution of exposures incl. collective investment undertakings investing in bonds (inter-quartile range and median), right scale the risk measure
Source: EIOPA Occupational Pensions Regulatory Reporting and Bloomberg

Source: EIOPA Occupational Pensions Regulatory Reporting

Source: EIOPA Occupational Pensions Regulatory Reporting

Note: The indicator is calculated based on reported investment income inlcuding unrealised gains and losses
Source: EIOPA Occupational Pensions Regulatory Reporting

Note: Tax expenses are excluded
Source: EIOPA Occupational Pensions Regulatory Reporting

Liquidity risks

Liquidity risks are at medium level with an increasing trend driven by the developments in the derivatives positions. The net asset value of IORP’s derivatives grew more negative (median moved from close to zero in Q2 to -2.2% of total assets in Q3) due to the further increase of interest rates in Q3-2023. The two indicators for the net market value of derivatives positions and 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 slightly increased to 52.6% (51.9% in the previous quarter), while the weighted average slightly declined. 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 2022. The weighted average for this indicator is higher, pointing to a more comfortable cash flow position for large IORPs. The indicator on the sustainability of the cash flow position (also annual), resulting from a comparison between premium contributions and benefit payments against liquid assets, is positive for most of the distribution and also considering the weighted average for the sector.

Note: The index is based on a weighting and bucketing of asset classes according to their liquidity
Source: EIOPA Occupational Pensions Regulatory Reporting

Source: EIOPA Occupational Pensions Regulatory Reporting

Source: EIOPA Occupational Pensions Regulatory Reporting

Source: EIOPA Occupational Pensions Regulatory Reporting

Note: The existence of negative cash holdings can result from collateral positions that are reported as negative assets
Source: EIOPA Occupational Pensions Regulatory Reporting

Reserve & funding risks

Reserve & funding risks (for DB schemes) remain in Q3-2023 at a medium level. The median excess of assets over liabilities gradually improved in recent quarters, reflecting the strengthening of the financial position of IORPs (20.7% in Q3-2023). The median for the funding ratio, calculated as assets over technical provisions, showed a similar pattern, standing at 122% in the third quarter of 2023. Life expectancy for both newborn persons and 65 year old persons in the EEA showed generally a decline according to the latest available data, standing respectively, at 81 years based on 2021 data and 20 years based on 2020 data.

Note: The indicator is calculated as excess of assets over liabilities as a share of liabilities
Source: EIOPA Occupational Pensions Regulatory Reporting

Source: EIOPA Occupational Pensions Regulatory Reporting

Note: Indicator is calculated based on the annual latest available expectancy at birth for all EEA countries
Source: Eurostat

Note: Indicator is calculated based on the annual latest available remaining life expectancy for a 65 years old person for all EEA countries
Source: Eurostat

Concentration risks

Concentration risks are stable at medium level. The median of investments in banks as a share of total assets slightly decreased in the third quarter of 2023, standing at 0.9% (1.3% in the previous quarter), while the median of investments in other financial institutions as a share of total assets remained stable, standing at 3.4%. The weighted averages for both indicators are at 4.7% and 8.6%, respectively, pointing to higher exposures for larger IORPs. The median exposure to domestic sovereign bonds as a share of total assets remained constant, standing at 0.8% in the third quarter of 2023. As for the other indicators, the weighted average shows a higher exposure (4.5%). Measures of portfolio concentration per asset class, issuer sector and issuer country are broadly unchanged compared to the previous quarter. These measures can be calculated only excluding investments via collective investment undertakings (CIUs), therefore showing high levels of concentration for those IORPs investing mainly via this asset class.

Note: Banks comprise all activities identified with NACE code K64.1.9. The numerator excludes collective investments
Source: EIOPA Occupational Pensions Regulatory Reporting

Note: The numerator excludes collective investments
Source: EIOPA Occupational Pensions Regulatory Reporting

Note: Herfindal Hirshman index computed on issuer sector excluding collective investments, cash and deposits and property. The indicator includes small IORPs investing mainly via CIUs and thus with a high level of concentration
Source: EIOPA Occupational Pensions Regulatory Reporting

Note: Other financial institutions comprise all activities identified with NACE codes K64 (excl. K64.1.9.), K65 and K66. The numerator excludes collective investments
Source: EIOPA Occupational Pensions Regulatory Reporting

Note: Herfindal Hirshman index computed on six balance sheet asset classes (government bonds, corporate bonds, equities, properties, cash and cash equivalents and loans and mortgages). Collective investments are excluded. The indicator includes small IORPs investing mainly via CIUs and thus with a high level of concentration
Source: EIOPA Occupational Pensions Regulatory Reporting

Note: Herfindal Hirshman index computed on issuer country excluding collective investments, cash and deposits, mortgages and loans and property. The indicator includes small IORPs investing mainly via CIUs and thus with a high level of concentration
Source: EIOPA Occupational Pensions Regulatory Reporting

ESG related risks

ESG related risks remain stable at medium level. The median exposure towards climate relevant assets as a share of total equity and corporate bonds slightly declined for the IORP sector in the third quarter of 2023, standing at 0.67% (0.98% in the previous quarter). Similarly the weighted average for the same indicator slightly moved downwards to 7.6%, still pointing to a higher exposure for larger IORPs. The median share of IORPs’ investments in green bonds over total corporate bonds increased slightly to 5.5% in Q3-2023 (from 5.3% in Q2). The median IORPs’ exposure to companies operating along the thermal coal value chain increased and is relatively low (0.26% of total equity and corporate bonds in Q3-2023, compared to 0.15% in Q2). Investments assessed w.r.t the EU taxonomy - eligible activity (TEL) as a share of total equity and corporate bonds decreased, with a median standing at 13.6% in Q3-2023 (15.2% in the previous quarter).

Note: The indicator is calculated as investments in green bonds as a share of total corporate bonds
Source: EIOPA Occupational Pensions Regulatory Reporting and Refinitiv

Note: The Global Coal Exit List (GCEL) from Urgewald (www.coalexit.org) provides coal-related data for around 3300 parents & subsidiaries that are part of the coal value chain or are expanding coal-related business. The indicator is calculated as investments into companies operating along the thermal coal value chain as a share of total equity and corporate bonds
Source: EIOPA Occupational Pensions Regulatory Reporting and Urgewald

Note: The six climate-relevant sectors (agriculture, fossil fuel, utilities, energy-intensive, transport and housing) based on their greenhouse gas emissions and mapped at NACE Rev2 4-digit level. Due to data limitations, there are assets which cannot be entirely included in the “climate relevant” category and therefore they are currently excluded from the calculation of the indicator leading to a potential underestimation of the risk. The indicator is calculated as climate relevant assets based on their greenhouse gas emissions as a share of total equity and corporate bonds
Source: EIOPA Occupational Pensions Regulatory Reporting

Note: The EU Taxonomy provides a definition of green activities. Within the EU taxonomy, a Taxonomy–eligible activity (TEL), based on the definition in European law, is an activity that is covered by the Taxonomy. However, a Taxonomy–eligible activity is not necessarily an aligned activity, as it is so only if it meets the relevant technical screening criteria. As such, one could be tempted to use the amount of Taxonomy–eligible activities as a proxy for the potential that a corporate has to improve its Taxonomy alignment. The indicator is calculated as investments assessed w.r.t the EU taxonomy as a share of total equity and corporate bonds
Source: EIOPA Occupational Pensions Regulatory Reporting

Digitalisation & cyber risks

Digitalisation and cyber risks are stable at medium level in the third quarter of 2023. The materiality of these risks for IORPs as assessed by supervisors slightly decreased in the third quarter of 2023, with cyber security remaining a main concern.

Note: Scores compiled based on the assessment of probability and impact (rhs: scale from 1 to 4) of digitalisation & cyber risks from National Competent Authorities. The average for each answer across countries is then normalised (lhs: scale from 0 to 100)
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.

Description of risk categories

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.

Environmental, Social and Governance (ESG) related risks¹

ESG risks aim at assessing the vulnerability of the European IORPs market to environmental, social and governance risks such as transition risk.

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).

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1. 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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