AEIP reply to EIOPA’s consultation paper on the draft Opinion on the supervision of liquidity risk management of IORPs
On 17 December, AEIP replied to EIOPA’s consultation on the draft Opinion on the supervision of liquidity risk management (LRM) of Institutions for Occupational Retirement Provision (IORPs). We agree with EIOPA that is prudent and necessary that IORPs have in place the necessary risk management functions. Notably, the current legislation already address this requirement. Under Article 25 of the IORP II Directive, pension funds are mandated to implement effective risk management functions to address liquidity and concentration risks.
In our response, AEIP emphasize the need for a comprehensive yet proportionate supervisory approach that adheres to the principle of minimum harmonization. This is critical due to the inherently diverse nature of IORPs across Europe. Pension funds face different sources of risk, and varying supervisory practices of liquidity risk management differ widely among Member States in terms of frequency and conditions. Therefore, it should be determined at national level which additional requirements are necessary.
EIOPA’s consultation paper highlights that only a small number of pension funds make significant use of derivatives or engage in other activities that carry substantial liquidity risks. Based on the findings of the consultation paper, we conclude that material risks are relevant only for IORPs that engage in the use of derivatives. We believe that additional obligations should not be introduced beyond the existing rules, which are already effective in managing liquidity risk. For instance, IORPs should retain flexibility to determine how to document and report their risk exposures. Some IORPs may prefer to report all risk exposures under the Own Risk Assessment (ORA) because they are not significantly exposed to margin and collateral calls on derivative positions. Others may opt to distinguish between risk categories and report them separately because they are more likely to face material derivative calls, as it is already done in the Netherlands.
Furthermore, AEIP underlines that pension funds do not operate in isolation. To meet variation margin calls, particularly under adverse market conditions, they depend on intermediaries and other external actors to access liquidity. Typically, pension funds cannot hold sufficient cash reserves to cover such calls and must rely on liquidity facilities and asset transformation to generate the necessary funds..
In our input, we highlighted the importance of central banks involvement as the only reliable provider of liquidity during periods of market stress. This approach would help preventing situations where pension funds face risks that exceed the scope of their own policies and governance structures. Supervisors should acknowledge these limitations when setting their expectations for liquidity risk management and ensure a balanced approach to mitigate systemic risks.
AEIP remains committed to constructive dialogue with EIOPA and other stakeholders to ensure that the regulatory framework supports effective risk management while reflecting the unique characteristics of IORPs across Europe.
To read our full input to the consultation please see here.