Pension funds should consider not investing in equities at all, according to a controversial new report from highly-rated analysts at UBS, the investment bank. The report contradicts the conventional wisdom followed by most funds over the past 40 years.

"We believe that the case against equity investment by company-sponsored defined-benefit pension funds is robust and worthy of serious consideration," according to the report from Mr Stephen Cooper and Mr David Bianco.

The analysts signalled they expect their conclusions may be harshly received in some quarters.

"We recognise the controversial nature of the subject and the wide range of opinions held, including among our own colleagues," they note.

Roughly 60 per cent of the average pension fund is invested in equities.

The debate about how pension funds should invest their cash has taken on particular urgency after three years of falling stock markets, that, along with falling long-term interest rates, have left company-sponsored defined-benefit pension schemes with large deficits.

Two years ago, the pension fund of Boots, the British pharmacy chain, switched its entire portfolio into bonds, locking in a large surplus and cutting running costs by 90 per cent.

Although debate about the merits of investment in equities has raged in actuarial circles since that move by Boots, the UBS report is the first time company analysts have raised the matter.

The conclusions of the report raise significant issues for stock market levels: if pension funds agree that equities investment is inappropriate, values may be depressed as institutional investors sell shares, or simply refuse to buy more.

The analysts argue that pension liabilities are simply another form of corporate borrowings, in this case borrowings from employees to pay shareholders.

If a company were to borrow money in the bond market and use the proceeds to buy a basket of equities, the effect would be the same, although more tax-efficient.

Even if investing in equities brings in higher cash flows than would come from bonds, "the resulting increase in risk negates this benefit and does not actually increase the value of the company", the analysts's report concludes. - (Financial Times Service)