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European pension deficits widened in 2016

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More companies are set to report an increase in their defined benefit (DB) pension scheme deficits for the 2016 fiscal year due to lower discount rates, according to Moody’s Investors Services.

In its international report analysing the credit implications of companies’ increasing pension funding gaps, Moody’s warned that higher deficits for European corporate pension funds were likely to be structural rather than temporary, because low interest rates were likely to persist for several years.

Richard Morawetz, Moody’s vice president for senior credit and author of the report, said: “Although rising interest rates could alleviate some of the burden of pension deficits, we expect the process of interest rate adjustments to take several years, and to remain susceptible to exogenous events such as Brexit.”

Even though rising interest rates could lift some of the burden of deficits, the ratings firm said it expected the process of interest rate adjustments to take several years.

Morawetz added that rising rates could also hurt asset values, offsetting some of the positive effects of a drop in pension obligations.

According to the report, the pension deficits of the 10 German companies with the largest pension “adjustments” in 2015 increased by more than €30bn between December 2015 and September 2016.

However, in the last quarter of 2016, several of those firms reported a big fall in pension provisions, and a concurrent rise in discount rate assumptions, Moody’s said, adding that this signalled a broad trend for corporate discount rates in Germany in that quarter.

Although low discount rates were a key factor driving the size of pension deficits, the report said, it also noted that there were other factors involved, including assumptions for longevity, future earnings, inflation and M&A activity.

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