Pension funds are poised to shift as much as $1 trillion fromstocks to bonds in coming years to lock in gains and limit thepotential for big losses, according to Wells Fargo & Co.

“Definitely there's a lot of money that will want to move,” saidAndy Hunt, head of global credit and liability-driven investing atWells Fargo Asset Management, who predicted the move will happenwithin roughly five years. “Best case, it'll be between a half atrillion and a trillion.”

Struggling to make up a shortfall in funding, many pensions heldon to large equity portfolios, trying to juice returns as ultra-lowinterest rates squeezed yields on bonds. But even a rally in the$27 trillion U.S. stock market wasn't enough to fix the problem.Now, with corporations taking steps to narrow the gaps, managersare shifting to less volatile assets.

Fear of getting burned may even accelerate the trend, Hunt saidin an interview.

The S&P 500's record high earlier this month has raisedconcerns among some prominent investors that a correction may benearing. Pacific Investment Management Co. predicts a 70%chance of a recession in the next three to five years, but saidinvestors should start reducing risk now.

If pensions plans are caught wrong-footed — as they were inbusts earlier this century — it can quickly spell higher costs foremployers. As shortfalls widen, companies must pay steeper leviesto the government's backstop, the Pension Benefit GuarantyCorp.

“There's a strong de-risking motivation,” Hunt said. “Thequestion is how impactful that's going to be for the stockmarket.”

So far, it's been muted. Pension systems at dozens of thebiggest U.S. publicly traded companies have been gradually boostingallocations to bonds and trimming their equity holdings in recentyears, even as many stocks continued to climb. Goldman SachsGroup's asset-management arm estimates that left plans with about35% of their holdings in equities at the end of 2016.

That's a lower level than the mid-1990s, when corporate andpublic pensions allocated more than half of their portfolios toequities, according to consulting firm Willis Towers Watson. Someof the retreat occurred after the dot-com bubble burst in 2001,then again after 2008 when “people saw that all risk assets couldfall out of bed at the same time,” Hunt said.

Rising interest rates are another impetus for pensions to favorbonds, according to Zorast Wadia, principal and consulting actuaryat Milliman. That's because higher rates lift a plan's projectedfunding level, freeing managers to hold less volatile, fixed-incomeproducts instead of stocks.

Busted Pensions

Companies once offered defined-benefit plans to lure and retainemployees by promising them prosperity in retirement. But buststhis century have left most U.S. corporate pensions in the red,with a more than $375 billion shortfall among the top 200plans.

Many companies have been trying to fund their pensions throughissuing debt or offloading liabilities to third parties, such asinsurers. That means many are less inclined to hold potentiallyvolatile stocks.

In recent decades, employers have migrated todefined-contribution plans to limit their liabilities, leavingtheir workers in charge of their own well-being. The mountingnumber of people using 401(k) plans had about two-thirds of theirholdings in stocks at the end of 2014, according to the InvestmentCompany Institute.

Such trends could help counter the impact on stock markets aspensions pull back, according to Steve Carlson, head of WillisTowers Watson's Americas investment business.

“You're seeing flows into defined-contributionplans,” Carlson said. “Typically that's going to have a higherallocation to equities.”

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