GLOBAL - Aon Consulting has alleged proposed regulatory demands on rating agencies could severely raise the risk of a large number of downgradings and impact pension funds as a result.

Aon has claimed regulatory changes afoot in the US are likely to negatively impact on the popularity of corporate bonds as an investment vehicle, and as such could deal a blow to pension schemes.

Chris Erwin, investment principal at Aon said: "Having missed the danger of the sub-prime crisis, credit rating agencies are being forced by the SEC to adopt new methodology that will mean companies will have to pay for their bonds to be rated, whether they like the outcome or not."

According to Erwin, the agencies are trying to fight this change to their business model in the short-term, "however ultimately this severely raises the risk of a large number of downgradings," he said.

The company argues credit rating downgradings can affect the price and yield of individual corporate bonds, as prices would fall and yields would rise, to the benefit of annuity issuers, who are only concerned about the stream of income, not ratings.

"Indeed, this was the case recently when a prospective buyer for a leading building society withdrew after two credit rating downgradings in a month," said Erwin.

He concluded: "For pension schemes the bad news is that it would damage capital values of holdings for those schemes with corporate bond investments."

Credit rating agency Standard & Poor's (S&P) declined to comment on speculation about its rating opinions.

Sources close to the matter suggested it was the first report to have made such a suggestion.

Agencies Moody's and Fitch Ratings could not be reached before publication.

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