Austrian pension funds to lose 7.5% in asset value due to climate risks

The value of assets in the portfolios of Austrian pension funds would decrease by approximately 7.5% in the event of an unexpected increase of the price of CO2 emissions through additional taxes to make fossil fuel investments less attractive, according to a stress test conducted this year by the by Austria’s Financial Market Authority (FMA).

This is an improvement from last year’s test showing a 10% loss in asset value.

This year’s stress test, carried out again to assess the transition risks of pension funds’ investment portfolios, is based on scenarios developed by the European Systemic Risk Board (ESRB), the Network for Greening the Financial System (NGFS), and on EIOPA’s assumptions, foreseeing a sudden increase in CO2 prices while measures to cut emissions are postponed.

The results of the stress test show that, if CO2 prices rise, government bonds lose 6.4% of their value, corporate bonds 5.7%, and equities 17.3%, according to the report on the financial situation of Austrian Pensionskassen published last week by FMA .

Austrian schemes hold 28% of total assets under management in investments with an impact on climate, mainly fossil fuel and energy intensive sectors, and real estate, according to the report.

The energy-intensive sector is the largest invested among those with an impact on climate, with around 12.4% AUM allocated, together with real estate (9.64%).

Assets under management amounted to €25.4bn at the end of the first half of this year, up 3.4% from €24.49bn at the end of 2022, including around 18% held in defined-benefit schemes and 82% of assets in defined-contribution or hybrid plans, it added.

The asset allocation went through little changes, despite rising interest rates, with bond allocations that remained largely unchanged in H1 at 37%, and the share of equities in portfolios returning at the level of 2022 (36%).

Austrian pension funds invest around 20% of their total assets in real estate, alternative investments and private equity investment funds. More than 96% of the pension funds’ assets under management are invested in funds (particularly in Austria).

Banks’ deposits increased to over 10% of assets, in connection to liquidity buffers and margin calls for derivatives, according to the report.

Austrian schemes returned 3.8% this year, from -9.68% at the end of last year, managing pension promises for 1,05m beneficiaries, up from 1.04m at the end of 2022.

Contributions have risen steeply in the last few years to reach a total of €1.82bn, outweighing liabilities of around €1,76bn, the report added.

Source: ipe