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Shortfalls whip up corporate panic

Pension fund shortfalls have come to the fore as new accounting requirements and credit rating agencies factor them in to assessments of corporate health.

Boots: made an astute move into bonds but hasn't had a rating benefit; J Sainsbury and Rolls Royce: both on negative credit watch after sticking with equities

DESPITE THREE YEARS of negative returns many pension funds have failed to make any significant changes to their investments, but shortfalls are hurting companies as never before. In an unprecedented move in February, Standard & Poor's issued a hit list of 12 European companies that might be downgraded because of pension liabilities. New accounting standards that force companies to mark their pension liabilities to market have added to the pressure.

UK corporates are under particular strain since their pension funds typically have higher equity allocations than those in continental Europe. US pension funds also have high equity weightings but they are not under the same pressure to mark liabilities to market.

The timing for corporates couldn't be worse, as equity markets continue to sink and bond yields remain low. It's not a great time to sell cheap equity and buy expensive bonds. Equally, clinging to the seductive myth that equities will outperform in the long run could also be a mistake.

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