Bond yield slump, low rates highlight UK pension shortfall risks

(Corrects paragraph 3 to say size of deficits exceeds 40 percent, not 50 percent)

* Falling bond yields push UK pension deficits to record levels

* Investors may be at risk from cash calls, analysts warn

* FTSE 350 pension deficits: http://reut.rs/29DEudU

* UK gilts and corp bond yields: http://reut.rs/29JknPa

By Alasdair Pal and Thyagaraju Adinarayan

LONDON, July 14 (Reuters) - A $500 billion gap in British company pension schemes, exacerbated by a further fall in bond yields after last month's Brexit vote, is stretching balance sheets and could discourage investors from buying some firms' shares.

The collapse in bond yields, which pension funds rely on for income to pay retirees, has left the near-5,000 underfunded pension schemes in the UK in an even worse position and has sharpened investors' focus on the companies most at risk.

Companies on the FTSE 100 are running a combined pension deficit in excess of 90 billion pounds, Thomson Reuters (Dusseldorf: TOC.DU - news) data shows. Deficits at BAE Systems (LSE: BA.L - news) , G4S (Copenhagen: G4S.CO - news) and FTSE 250-listed AA (Other OTC: AATDF - news) exceed 40 percent of the firms' respective equity capital.

Analysts at investment bank UBS (LSE: 0QNR.L - news) say they have been fielding calls since Britons voted to leave the European Union in a June 23 referendum from clients looking for guidance on companies most exposed to the trend.

Pension schemes skidded back into focus in Britain after the collapse in April of department store BHS, which went into administration with a 571 million pound pensions deficit.

"Deficits will become increasingly important to investors as yields continue to fall," said David Moss, head of European equities at BMO Global Asset Management.

He cited telecoms company BT as a "classic example" of where investors can be put off buying a stock because of a ballooning pension deficit.

BT's deficit has risen by 50 percent to 10.6 billion pounds in the last 18 months, according to analysts at Macquarie.

BT did not respond to a request from Reuters for comment.

HUNT FOR YIELD

Firms are required to assess pension valuations regularly, usually every three years, and recent developments will have worsened funding for many, said Sarah Brown, senior consultant at Punter Southall.

Bond yields, already near record lows, were compressed even further as investors flocked to safe-haven debt in the aftermath of the Brexit referendum.

An expected cut in interest rates from the Bank of England to dampen the economic fallout from the shock vote is likely to push them even lower.

"The continued erosion of interest rates over the past 12 years has already hit pension schemes hard," said Andy Green, Chief Investment Officer at Hymans Robertson. "And the situation could get worse over the coming months if the Bank of England chooses to lower rates even further."

A Reuters poll showed the BoE (Shenzhen: 200725.SZ - news) would cut rates on Thursday.

Companies calculate their liabilities to pensioners using a "discount rate", based on the yield on AA-rated corporate bonds.

Those with sizeable deficits could be forced to set aside more money to fund pensions, reducing the sums available for new investments, or to raise capital, which risks stretching balance sheets.

Contacted by Reuters, AA and G4S said they were both currently conducting triennial reviews into their deficits.

BAE Systems said the company has already put in place a regulator-approved plan to deal with its pension deficit.

BAE's shares have rallied more than 16 percent from their Brexit lows, partly on the back of investors buying shares of companies with significant offshore revenues.

British Airways parent International Airlines Group said on July 1 it had missed a deadline for agreeing on a plan to fill its multi-billion pound deficit, underscoring the challenges some companies face. http://bit.ly/29NuguM

MIND THE GAP

Some 84 percent of all UK pension schemes were underfunded at the end of June, according to the Pension Protection Fund, with the total deficit hitting a record 383.6 billion pounds ($509.57 billion).

Falling bond yields make plugging the gap much harder. Yields on 10- and 30-year gilts are close to record lows.

UBS estimates that a 1 percent fall in gilt yields increases pension liabilities for the FTSE 100 by 10 percent but warns that the impact on individual companies could be much worse.

The broker identifies UK industrials as the most at risk on rising pension liabilities, along with utilities and telecoms.

"It is always good to think about because it is a balance sheet issue," said Andrew Parry, head of equities at Hermes Investment Management. "Companies with pension deficits often have bad balance sheets."

The drop in sterling, which increases the cost of importing goods and services, could stoke UK inflation, analysts and economists have said. This would pile even more pressure on pension deficits, Deutsche Bank (LSE: 0H7D.L - news) warns.

($1 = 0.7528 pounds) (Additional reporting by Carolyn Cohn; Editing by Catherine Evans)