The European Insurance and Occupational Pensions Authority (EIOPA) has launched its fifth stress test of occupational pension funds in Europe. The 2025 exercise probes the sector’s sensitivity to rapid movements in yield curves and focuses on liquidity risks in light of recent years’ market episodes underlining their relevance for long-term institutional investors, especially those exposed to synthetic leverage through derivatives or liability driven funds.
This year’s stress test assesses the ability of European institutions for occupational retirement provision (IORPs) to respond to and deal with adverse economic developments. The exercise features two distinct scenarios – developed in collaboration with the European Systemic Risk Board– which simulate sharp increases and declines in interest rates, respectively.
Under the “yield curve up” scenario, interest rates increase sharply as market participants anticipate economic developments related to an abrupt escalation of geopolitical tensions. These lead to trade disruptions, higher commodity prices and weaken the euro against other reference currencies.
In the “yield curve down” scenario, interest rates plummet as market participants internalise the effects of prolonged geopolitical tensions, triggering a loss of confidence in financial markets. A persistent lack of investment and subdued productivity lead to lower GDP growth. Global risk-free rates decline, and the euro depreciates sharply due to the unanticipated prolongation of geopolitical tensions and a worsening economic outlook for the region.
In both scenarios, the deterioration in the economic outlook leads to a loss of confidence in financial markets and to disorderly adjustments in asset prices.
The scenarios are designed to gauge the impact of these shocks on the liquidity position of IORPs and to assess their ability to manage liquidity risks under various economic conditions. The stress test exercise will also analyse aggregate responses to these shocks to evaluate potential spillover effects that may arise from IORPs’ management actions.
The stress test’s sample includes all countries within the European Economic Area where the total assets of registered IORPs exceed €600 million. Participants have been selected to cover at least 60% of each national market, while giving priority to IORPs that use derivatives.
The publication of the stress test results is foreseen for mid-December 2025, following the calculation and submission of results by participants and a thorough validation process by supervisors.