Fitch Ratings has warned German and UK companies that defined benefit (DB) scheme deficits are more susceptible to longevity than low interest rates.
The ratings agency said that while a fall in discount rates used by DB schemes had recently driven up liabilities, its impact was not a serious as long-term increases in longevity.
It calculated that in 19 UK and 14 German listed companies analysed, deficits rose 38% and 44%, respectively, over the course of 2014 – in both cases driven by low interest rates.
However, for the UK schemes, Fitch suggested an increase in longevity assumptions by two years would immediately add £1.3bn, or 9.2%, to average deficits in its sample – and would be very unlikely to reverse.
The agency said yields for corporate bonds used in International Financial Reporting Standards (IFRS) would eventually rise and reduce liabilities on that front.
“It would take discount rates to move from the current 3.5% to 4.7% to wipe out the current average deficit of £2.7bn based on our sample of UK corporates,” it said.
“Low rates have been the main factor behind big increases in corporate pension deficits in the UK and Germany.
“But interest rates are expected to increase in the medium term, which will eventually at least partially reverse the deteriorating deficits.
“An increase in longevity beyond what has already been factored into expected pension obligations, however, would lead to an increase in deficits and would be highly unlikely to be reversed.
“Historically, pension schemes have tended to underestimate these improvements, suggesting their longevity assumptions may have to be revised up,” Fitch’s report added.
Fitch said there were few significant changes in longevity assumptions used in company pension scheme accounting in 2014 compared to 2013.
The ratings agency said expected increases in interest rates and longevity could offset each other, with its impact on funding depending on the timing of the change, the discount rate and investment returns.
“If the longevity assumption improves further in future – the pension deficits will follow suit,” it added.