Institutions for occupational retirement provision (IORPs) that hold derivative instruments are exposed to substantial liquidity risks. In some EU member states, IORPS make considerable use of derivatives to reduce interest rate and foreign exchange risks. However, these hedging positions also make them vulnerable to rapid changes in interest rates and/or the value of foreign currencies, potentially triggering short-term margin calls that IORPs would need to meet.
These vulnerabilities underline the need for a thorough assessment of IORPs’ exposure to liquidity risks – including margin and collateral calls, early withdrawals and outgoing transfers – as well as their ability to manage these risks. This consultation paper sets out EIOPA’s draft Opinion on the supervision of IORPs’ liquidity risk management. Its objective is to enhance convergence in oversight to protect pension fund members and beneficiaries and to bolster the stability of IORPs and the wider financial system.
The draft Opinion encourages a risk-based, forward-looking and proportionate approach and expects supervisors:
- to monitor and assess the liquidity risk exposures of IORPs,
- when IORPs are found to have material liquidity risks, to assess their ability to manage these risks, and
- to ensure that IORPs exposed to material liquidity risks fulfil some key principles regarding the management of this exposure, including by stress testing cash flows, drawing up contingency plans and creating a buffer of liquid assets to cover any shortfalls.
Consultation Process
EIOPA invites stakeholders provide their feedback on the Consultation Paper and the draft Opinion therein by responding to the questions via the online survey no later than 20 December 2024. EIOPA expects to publish the final Opinion in the course of 2025 together with a feedback statement on stakeholders’ responses. All responses will be published on EIOPA’s website unless otherwise requested.