Rising longevity poses a much greater threat to companies with defined benefit (DB) pension schemes than low interest rates, Fitch Ratings has warned.
By analysing the financial results of 19 companies in the FTSE 100, it found a two-year increase in longevity would increase their total 2014 reported pension deficits by 47% to almost £75bn.
This longevity assumption is over and above what has been included in the pension models. The ratings agency said schemes have historically tended to underestimate improvements in longevity, suggesting they may have to revise assumptions.
Pension deficits have ballooned in recent years because of persistently low interest rates, with total deficits of the 19 corporates increasing by 38% to £51.2bn last year.
While a rate rise expected next year would improve funding levels, Fitch anticipates this could be offset by rising longevity, however.
Discount rates would need to move from 3.5% to 4.7% to eliminate the average £2.7bn scheme deficit based on Fitch's sample, assuming other variables were the same. Increasing the longevity assumption by two years would add another £1.3bn to the average deficit.
If interest rates remain at low levels for longer this, coupled with a significant increase in longevity, would require extra cash contributions in the short term to plug deficits. While it is difficult to predict life expectancy trends, longevity is expected to increase.
Fitch said while it does not expect short-term movements in deficits to have immediate impact on companies' ratings, those with significant deficits could have to pay higher contributions, and will be more exposed in the long term.
The firm highlighted the fact that pension deficits of BAE, BT and GKN, were higher than their total reported equity at their respective year-ends.
Fitch said there was no significant change in longevity assumptions used in the companies' pension fund accounting in 2014 compared to the previous year. It also pointed out that some pension funds have contracted longevity swaps to mitigate the risk, which the firm did not take into account in this report.
The 19 companies analysed
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