UK- Rating agency Standard & Poor’s has announced it may begin downgrading the credit ratings of companies in Europe with pension funds that have large deficits. The action will particularly affect UK firms where the new accounting standard FRS17 is designed to reveal their pension scheme’s funding level at a given point.

S&P claims the move is in response to the continued declines and volatility in the world’s equity markets.

It is seen by many in the pensions industry as another nail in the coffin for defined benefit schemes in the UK, as the action is likely to lead to a further wave of closures.

Downgrading credit ratings would ultimately affect earnings and undermine companies’ ability to meet their pensions obligations.

Says Chris Legge, director of corporate ratings at S&P: “if the pension fund deficits we are seeing emerge under FRS17 have an impact on companies’ credit quality, it could lead to us downgrading their credit ratings. This in turn would mean that the cost of capital would go up, adding further pressure on cash flow and earnings.”

S&P says it intends to ask companies in the UK and Europe about their current pensions assets and liabilities in the coming weeks and expects to be in a position to begin downgrading within the next two months.

The move follows a statement from S&P recently that it intended to ask companies in the US to reveal their pension fund’s financial position in the middle as well as the end of year, as recent market turmoil meant that the funding levels of pension schemes could change radically for month to month.

S&P believes looking at schemes’ financial positions just once a year has become inadequate and that many companies are overoptimistic in the assumptions they make about the return they expect on their scheme’s assets.