Longevity is a bigger risk for corporate pension funds in the U.K. and Germany than the effects of low interest rates, Fitch Ratings said.
In a new research paper, the ratings and research provider said low rates might be causing an increase in corporate pension fund deficits in the U.K. and Germany, which it said are the largest defined benefit markets in Europe, but rates are expected to rise in the medium term. In a news release accompanying the research, Fitch said the increase in rates will eventually partially reverse the rise in deficits.
An increase in discount rates to 4.7% from the current average of 3.5% would wipe out the average £2.7 billion ($4.2 billion) deficit in these markets.
An increase in longevity, however, would be “highly unlikely to be reversed.” With increases set to continue, assumptions might need to be revised up, Fitch said. Taking a sample of FTSE companies, Fitch Ratings estimated that a two-year increase in longevity would add £1.3 billion to current average deficits, based on the current interest rate.
The effect of these potentially increasing deficits on their sponsoring companies varies between the U.K. and Germany. In the U.K., increased deficits for pension plans could lead to an increase in cash contributions from the sponsor. In Germany’s unfunded system, companies are not required to maintain a particular funding level.
Fitch added it does not expect short-term movements in reported deficits to have immediate implications for a company’s rating, but those with significant legacy pension deficits, and where cash contributions might rise, “will be more exposed in the long term.”
