Key achievements: Driver 5

Financial Sustainability

The Financial Study provided the EPO with a comprehensive picture of how its finances are projected to evolve in the long term. Phase one of the Financial Study involved a strategic financial evaluation for the period from 2023 to 2042, focussed on assessing the long-term financial outlook of the Office. This evaluation took into account developments in the economic, financial and technological landscapes that have occurred since 2019, particularly in light of a surge in inflation from 1.2% in 2019 to highs of 8.4% in 2022 and 5.4% in 2023^[1].

The findings, presented to the Budget & Finance Committee (BFC) and the AC in the last quarter of 2023 (CA/68/23), revealed a favourable trajectory based on the base-case scenario assumptions resulting in an overall expected coverage surplus of EUR 4.2 billion, especially when compared to the previous study conducted in 2019 in a context of low interest rates. However, sensitivity analyses highlighted ongoing vulnerabilities to capital market fluctuations and inflation, which could impact EPO's funding requirements.   

In response, the EPO mandated the external consultant Oliver Wyman Mercer to conduct an Asset Liability Management Study (ALM Study) in the first quarter of 2024. This Study aimed to identify options for optimising available funding sources and to define a comprehensive funding plan to achieve full funding of all the long-term obligations.

The results of the ALM Study were presented during the May BFC and the June AC meetings (CA/23/24). The ALM study emphasised the need to make explicit the level of risk the EPO can accept in pursuit of its financial objectives. The EPO proposed a set of orientations designed to enhance its long-term financial sustainability (CA/39/24). Following a positive opinion from the AC on the orientations proposed, the Office made progress on these recommendations in the second half of 2024:

• The Office formalised the level of risk it is prepared to accept, increasing the probability of achieving target returns from 50% to 66%. This adjustment positions the Office more favourably to withstand potential risks from adverse developments in long-term capital markets and inflation volatility.
• Financial security buffers have been created by allocating assets within the EPO Treasury Investment Fund (EPOTIF) to three key reserves: the Sustainability Buffer for extraordinary circumstances (EUR 1 billion); the Operational Reserve for short-term liquidity needs (EUR 2.5 billion); the SAM Buffer to mitigate legal risks arising from the pending ILOAT judgement on the salary adjustment method (EUR 1.1 billion at the end of 2024, with the goal of reaching EUR 2 billion by 2026).
• We continued to make progress on the factors that are under our control, so that we can achieve long-term financial sustainability even in the face of unexpected economic shocks and negative external influences. Productivity objectives as well as our approach to recruitment and replacement of departing staff have been incorporated in the medium-term business plan and developed in line with the assumptions used in the financial study. This approach allowed the Office to contain its staff costs and contributed to achieving a strong cash surplus of EUR 573 million in 2024.
• The EPO further improved its funding level from 73% in 2023 to 80.1% at the end of 2024 thanks to a strong operational performance and the positive development of assets managed under EPOTIF and the EPO Reserve Funds for Pensions and Social Security (RFPSS). This supports our goal of reaching a desired funding level of 105% of the Office's defined benefit obligations by 2032, factoring in a 5% safety buffer to ensure that the funding level remains above 100% during periods of capital market volatility.
• At the end of 2024 the EPO initiated the establishment of a risk management and monitoring framework. A concept (CA/89/24) was submitted to the BFC and the AC. The concept foresees the tracking of relevant risk KPIs and a model dashboard showing risk KPIs in three main categories (strategic, macroeconomic and operational), to be made available to member states. It also foresees a comparison of the latest available actual values against the relevant values defined in the base case scenario of the Financial Study. Direct access to the risk KPIs dashboard, along with regular reporting provided by the EPO, will ensure that the governing bodies have a clear understanding of the EPO's financial situation, as well as of the progress made in the implementation of the orientations defined in the Financial Study.
• We enhanced the financial sustainability of EPO's pension and social security schemes. The EPO regularly conducts actuarial valuations to comprehensively review the assumptions that might influence the balance of social security and pension schemes and determine the contributions rates needed for their future equilibrium. Consistent with the outcome of the financial study and the financing policy of the Office, the mandate of the Actuarial Advisory Group has been reviewed, so that the 2025 actuarial valuation takes into account the new risk tolerance of the Office and considers the discount rate accordingly. In addition, the mandate of the Actuarial Advisory Group now includes a yearly assessment of the funding levels of the social security and pension schemes.

These milestones collectively reinforce the EPO's commitment to achieving long-term financial sustainability amid evolving economic conditions.

Figure 37 – SP2028 Financial sustainability pipeline

The KPIs under driver 5 showed positive evolution in 2024. In particular, "Productivity" steadily increased over the year, reaching a record of 111.5 SEO products per FTE in December 2024 and surpassing the yearly target. This represented a productivity increase of 4.8% over the previous year. In 2024, our production plan was well implemented, with no deviation between the actual output and the set target. Additional details can be found in the section on driver 3.

To achieve financial sustainability, we need to ensure that our long-term liabilities are covered. At the end of 2024 the funding level KPI, showing the ratio between the RFPSS assets and the defined benefit liabilities, reached 80.1% and marked a 9.7% increase in liabilities covered.

^[1] Eurozone EURO area inflation