UK – A wholesale shift by pension funds away from equities to bonds prompted by liability-driven investing could cut UK corporate profits by billions of pounds, according to consulting firm Pension Advisor Review.

PAR managing director Keith Faulkner based his comments on the different expected rate of return of bonds and equities and outlined his reasoning in a letter to the Financial Times.

“If, therefore, these pension schemes switched their equity holdings into bonds – as advocated by some of the more aggressive supporters of LDI – the expected rate of return on overall assets would fall by about 2.8% of the current equity holdings, or £3.8bn (€5.6bn) every year.

“Extrapolating all UK pension schemes, we estimate that this translates into a total profit drop of about £11bn.

“Using a price-earnings multiple of, say, 10 implies a potential drop in market values of £110bn.”

But the shift would not happen overnight – but “it has started to happen and who knows where it will be in a few years”.

Faulkner is a former worldwide partner at Mercer. In October PAR released research which showed that the “big three” consulting firms – Watson Wyatt, Mercer and Hewitt - dominate the UK corporate pension consulting market.

And in August PAR was in the headlines for finding wide variations in assumptions used by companies and actuarial advisers to calculate FRS17 pension liabilities.

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