The european pension funds sector

• Author: European Insurance and Occupational Pensions Authority (EU body or agency)
• Pages: 44-48

4. THE EUROPEAN PENSION FUNDS SECTOR

In 2019, the European occupational pension fund sector’s

investments benef‌itted from positive developments in

the stock markets, yet, in particular the Def‌ined Benef‌it

sector, continued to be negatively aected by the persis-

tent low interest rate environment due to low discount

rates for market-consistently valued liabilitie s. The in-

vestment returns throughout the EEA have reached new

heights, marking astrong turning point from the dicult

equity markets in 2018. The prolonged low, and nega-

tive, interest rate environment aected Def‌ined Benef‌it

pension funds, as long-term guarantees continued to be

expensive. Yet, the aggregate eect of the positive mar-

ket developments throughout 2019 resulted in improved

cover ratios throughout the EEA .

Following apositive year for European IORPs with regard

to investment returns and subst antial increases in asset

market values and improved cover ratios, the sector has

been heavily aected by the market turmoil in the wake

of the Covid-19 pandemic, which swept away substantial

value gains of 2019. In line with the f‌indings of the 2019

IORP stress test, IORPs are expected to keep along-term

objective to their investments and most IORPs aim at

re-balancing to pre-stres s allocations within 12 months.

Due to the character of the crisis, IORPs may not only

face further market volatility and impairment of assets

in apersistent low interest rate environment, yet may be

subject to funding and liquidity concerns due to suspend-

ed or lowered contributions from sponsors and members.

Deteriorating coverage and funding ratios of Def‌ined

Benef‌it IORPs require supervisory monitoring and poten-

tial actions, which usually entail setting up recovery plans

and close coordination with the NCAs. The impacts of

the Covid-19 crisis may lead to benef‌it cuts for members

and may require sponsoring undertakings to f‌inance fund-

ing gaps, which may lead to additional pressure on the

real economy and on f‌inancial institutions sponsoring an

IORP. Considerations should also be given to the eects

on IORPs’ liquidity when benef‌it payments will remain rel-

atively stable or tend to increase- usually there is limited

redeemability of funds set by national law-, yet contribu-

tions from members and sponsoring undertakings may be

delayed or cannot be paid in.56

Sponsoring undertakings in heavily aected sectors by

the COVID-19 pandemic are expected to be in signif‌icant

f‌inancial distress and correspondingl y, members of such

pension funds are at risk of unemployment in the near

future. Sponsoring undertakings’ f‌inancial diculties to

maintain contributions, or in the worst case, sponsoring

undertaking’ insolvency may test national pension pro-

tection schemes. The set-up, structures and design of

such pension protection schemes are divergent amongst

Member States and the use of such may require supervi-

sory attention.

4.1. KEY DEVELOPMENTS

In 2019 total assets held by occupational pension

funds increased - in line with the reported return of

assets- by 15 %, yet not by increased membership or

contribution levels. In 2018, the European IORPs sector

suered from marginal and even negative investment re-

turns, so the asset-weighted average of 15% constitutes

aremarkable increase, considering growth rates of around

5% in the years before 2018.

With the departure of the UK, the Nethe rlands ac-

count for 67% of the European Occupational pensions

sector in terms of assets under man agement (Ta bl e

4.1). With EUR 1.6trn of assets under management in NL

and EEA total of EUR 2.4trn, NL is by far the biggest IORP

sector in the EEA. (Figure 4.1) End-year 2019 NL IORPs’

investment represented almost 200% of NL GDP in 2019.

Whereas the next biggest IORP sector, DE, with its EUR

235bn at year-end 2019, represent only 7% of DE GDP in

2019. (Figure 4.2)

56 Financial Times: Groups hit by coronavirus s eek to halt pension con-

tributions, 18 March 2020; ht tps://www.f t.com/content/c421 7e98-69 26-

11ea-800d-da70c 6e4d3.

EUROPEAN INSURANCE AND OCCUPATIONAL PENSIONS AUTHORITY

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