OREANDA-NEWS. Ever-increasing life expectancy poses a greater risk to corporate pension schemes in the UK and Germany than current low interest rates, Fitch Ratings says.

Low rates have been the main factor behind big increases in corporate pension deficits in the UK and Germany, which are by far the largest defined-benefit pension markets in Europe. But rates are expected to increase in the medium term, which will eventually at least partially reverse the deteriorating deficits. Our analysis of a sample of FTSE corporates, for example, shows that an increase in discount rates from the current average 3.5% to 4.7% would wipe out the GBP2.7bn average deficit, assuming other variables are unchanged.

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.

While it's impossible to accurately predict improvements in life expectancy, increases are set to continue. Historically, pension schemes have tended to underestimate these improvements, suggesting their longevity assumptions may have to be revised up. For the sample of FTSE corporates, we estimate that a two-year increase in longevity would add GBP1.3bn to the current average deficits based on the prevailing interest rate.

The impact of growing deficits on companies depends on the regulatory regime under which they operate. In funded schemes like the UK, a deficit can rapidly lead to an increase in cash contributions. In unfunded ones like Germany, companies are not required to maintain any particular funding level so cash payments are typically unaffected. We do not include pensions as a debt-like item when calculating leverage metrics but instead reflect cash contributions in our company-level forecasts.

We do not expect short-term movements in reported deficits to have immediate rating implications. However, companies with significant legacy pension deficits, and where cash contributions may rise, will be more exposed in the long-term.