Proposed changes to pension fund accounting in the US are likely to prompt a shift of investment away from equities and into bonds while speeding the demise of defined-benefit plans, according to investment experts.

The accounting changes under consideration by the Financial Accounting Standards Board would require defined-benefit funds, which hold about $4,000bn (?3,399bn ?2,336bn) in assets, to stop gsmoothingh their returns and instead report actual returns each year.

Fund managers argue that the changes will create volatility in corporate earnings because companies would be required to include their pension returns in their quarterly earnings statements.

gCompany earnings would [be] at the mercy of what the pension fund can earn in the stock and bond markets,h said Alistair Lowe, director of global asset allocation at State Street.

The changes face gvigorous oppositionh from the private sector, according to Michael Moran, vice-president of portfolio strategy at Goldman Sachs.gFor companies that still maintain large pension plans, these changes could be enormous,h he said in a recent report.

Mr Moran said the changes would have an impact on capital markets, with investment flowing from equities to fixed income as pensions tried to limit risk by matching their investments to their long-term liabilities.

The asset allocation shift would lower returns, and funds would seek to redress this by using more derivatives and alternative investments such as hedge funds.

A report by the Committee on Investment of Employee Benefit Assets has estimated that switching to gmark to marketh accounting would result in $290bn in funds being shifted from equities to bonds. Business lobbyists in Washington warn against attempts to overhaul the current system.

Bruce Josten, executive vice-president at the US Chamber of Commerce, said the debate could turn into ganother propellanth for non-union companies to move away from voluntary private pension plans, by forcing them to move too much capital to fund their pensions.

gIf we are going to force these companies in an intensely competitive global environment, where many new competitors donft have these legacy costs, [to put huge amounts of capital into pensions] . . . they are going to find a way out of that process,h Mr Josten said.

Lynn Dudley, vice-president of retirement policy at the American Benefits Council, said she was concerned that FASBfs singular focus on accounting rules might cause bigger pension policy issues to be ignored. gA mark to market substitution doesnft make a lot of sense for a country that is relatively dependent [on the private sector] paying $120bn a year in benefits,h said Ms Dudley gWefre hopeful that the business community will weigh in on FASB. It is not going to be done in a vacuum.h

Mr Moran said the changes would hasten the decline of defined-benefit plans. gMany companies will freeze their plans. Some companies canft get rid of them ? GM, Ford, the Baby Bells ? but many more will freeze their plans if they can.h Instead, workers will be shifted to defined-contribution plans.

Two-thirds of the companies in the Standard & Poorfs 500 index still have defined-benefit plans, although many have already been frozen.

State and government pension funds, widely believed to be in worse shape than private funds, are unaffected by the changes.

Government accounting standards often follow FASB but in this case the proposed changes might be unpalatable to politicians, who would have to put more money into state pension funds immediately.

Matt Scanlon, head of Americas institutional business at Barclays, said some states were already proposing to shift to a defined-contribution system as a way of staving off crisis.

Additional reporting by Stephanie Kirchgaessner in Washington.