EUROPE – Ratings agency Fitch has entered the debate on whether the size of pension deficits should affect companies’ credit ratings.

And it says that its credit ratings of companies are likely to be affected by pension liabilities over the next few months.

“Ratings are likely to start to be affected over the next few months as declines in asset values supporting these liabilities start to be disclosed in 2002 results,” Fitch said in a report on European pensions.

Fitch is following its rival Standard & Poor’s, which has begun to downgrade companies because of pension liabilities.

“The general rise in pension liabilities does require some modification to Fitch’s financial ration analysis,” Fitch acknowledges.

It says it will start to add pension fund deficits to financial indebtedness as a “supplementary tool” in its quantitative financial analysis. Fitch will also adapt its coverage ratios to establish the ability of a company’s profits and cash flow to cover pension contributions.

The adapted coverage ratios would enable it to quantify the impact of pension fund deficits on credit ratings more accurately, it says. The move would “improve transparency for the investor”.

“Our initial conclusions are that European corporate credit ratings are not changing in a wholesale fashion because of this issue,” Fitch added.

There were problems with the different accounting standards in use in Europe, it said. “Significant additional convergence needs to take place in order to allow true cross border analysis of companies and in particular pension arrangements for companies.”

It added that ratings changes were most likely where a company has to increase the cash it must put into its pension scheme while diverting funds from other lenders.

Fitch said it had been “informally” taking pension deficits into account when analysing German firms, though it would now put that on a more formal basis.

S&P said on March 20 that it “views unfunded liabilities relating to defined benefit pension plans and retiree medical plans as debt-like in nature”.