Pension funds in Europe saw their aggregate funding level reduce to 119% from 120% during 2023, the European Insurance and Occupational Pensions Authority has said, mainly driven by Dutch pension funds, but calls the insurance and pensions sector “resilient”, while warning of emerging risks. 

The EU’s insurance and pensions supervisor found the European occupational pensions sector “remains resilient, though sensitive to monetary policy shifts”, as it published its latest Financial Stability Report on 28 June. 

Total pension fund assets increased to €2,673bn, from €2,452bn, between the fourth quarters of 2023 and 2022, mainly thanks to a 14.4% increase in the value of government bonds held, while equities increased by 9.3%. Eiopa noted that pension funds prioritised liquidity to hedge interest rate derivative mismatches in response to inflation movements and banking sector turmoil at the start of 2023. 

While the positive markets led to asset growth, total liabilities increased from €2,104bn to €2,301bn, which includes defined contribution schemes. On the defined benefit side, liabilities went up more than assets, pushing funding levels down slightly from 120% to 119%, which was “mainly the result of the financial developments in the dominant Dutch [pensions] sector”, the report states. 

The agency puts the reduced funding levels in the Netherlands down to the fact that the Dutch system uses mark-to-market discount rates and provides inflation indexation, while many other countries apply a fixed discount rate to arrive at technical provisions. Excluding the Netherlands – which represents 63.5% of pension assets in the European Economic Area – the funding level of DB schemes improved slightly, given the differing valuation methods. 

Eiopa chair Petra Hielkema said the pensions and insurance industries have demonstrated resilience in the face of rapidly evolving challenges. 

“However, we cannot afford to be complacent going forward. We must remain vigilant regarding emerging risks and find responses to them that will further strengthen our sector, benefit citizens and contribute to a safer and more sustainable world,” she added.  

There is concern over future adequacy as Eiopa points to pension savings gaps, particularly among women.  

It said: “Europeans are not saving enough for their retirement with the gap only growing larger year by year. In addition, women keep being in a worse position compared to men.” 

Eiopa is calling for national pension tracking systems, having advised the European Commission on best practice for establishing this in 2021, and says the initiative is still high on the agenda, pointing to the need to not only manage but close the savings gap. 

It has also proposed to strengthen its capacity so that it can analyse emerging risks in the pensions sector by collecting look-through data on pension fund investments in UCITs and derivative information, to fill data gaps. 

The agency noted that investors stocked up on alternative assets when interest rates were low. Such assets are often illiquid, difficult to value and sensitive to interest rates, it said, and “have raised supervisory and financial stability concerns. As a result, supervisors are closely monitoring the risks associated with such investments.” 

The agency warned of risks arising from climate change, with insured losses from severe rainfall and hail over the past two years setting new records in Italy and France. This is despite the fact only 10% of the damage was covered by insurance. 

Risks from digitalisation are currently rated at medium level by Eiopa, but it said forward-looking assessments point to an increase, with cybersecurity weaknesses and hybrid geopolitical conflicts being the primary concerns.