UK firms with big pension schemes face share price drag

* Even (Taiwan OTC: 6436.TWO - news) when scheme is well funded, shares are hit - study

* For every 100 pounds deficit, shares take 160 pound hit

* New push to shift risk off company balance sheets

By Simon Jessop

LONDON, Sept 22 (Reuters) - Investors penalise companies with big pension liabilities even when the schemes are well funded, a report on Monday showed, underpinning the drive of many firms to ditch their obligations to retirees.

Demand to shed those liabilities, or protect against them getting worse, has climbed since the financial crisis because low bond market yields have hit investment returns - and that trend has continued apace in 2014.

Looking at UK blue-chip stocks in the FTSE 100, the study found that when two firms had identical levels of assets in pension schemes relative to company assets, the one with higher pension liabilities tended to have a lower valuation.

The study by consultants Llewellyn Consulting also found that for every 100-pound increase in the reported pension deficit of the companies studied, the value of the firm fell by 160 pounds.

"Whether through valuation adjustments, specific risk assessment, or crude rules of thumb, both the size of the pension deficit itself and the scale of the associated pension obligations really do matter to markets when assessing company value," said the study, funded by pension fund buy-out specialist Pension Insurance Corporation.

Collective pension obligations in the United Kingdom have risen over the summer, as record low bond yields decrease the income paid on pension scheme investments.

Consultants Mercer put the total deficit among FTSE 350 companies at 90 billion pounds ($146.9 billion) in August, a month-on-month widening of some 17 billion pounds that meant schemes had 87 pence in every pound they were expected to need.

That worsening in the deficit situation is likely to add to pressure on FTSE finance directors to shift the responsibility for paying old workers to others, or to take steps to insure against them living longer.

"We're seeing a huge increase in interest and activity in ... companies managing the risk associated with DB (defined benefit) pension plans. They're increasingly aware of the volatility and how that can cause problems with analysts and the market," said Alan Baker, UK head of defined benefit risk at consultants Mercer.

"So many of the schemes are closed to new members and increasingly closed to future accrual, so they just sit there on the company balance sheets as a liability, so why wouldn't they seek to manage it?"

AMBIGUITY

Among FTSE 100 companies to engage in such deals so far in 2014 are insurer Aviva (Other OTC: AIVAF - news) , which in March announced a 5 billion pound longevity swap, a derivative contract that saw the old-age risk parceled out to reinsurers.

That was followed in July by a record deal by telecom firm BT to cover 16 billion pounds of its scheme liabilities.

Insurers such as Legal & General (LSE: LGEN.L - news) and Aviva have highlighted how important corporate demand for such deals will be to future profits.

For Anne Richards, chief investment officer at Aberdeen Asset Management, the deficit a company faces is important because it is recorded as a liability on the balance sheet, but it would rarely be the sole factor in a decision not to invest.

"We always bear in mind that deficit calculations are quite technical calculations and can vary enormously depending on some very small changes in assumptions," she said.

Richards said she looked at deficits in the context of a company's ability to pay and willingness to pay, in addition to the underlying cash flow generation of the business.

She said this was because the deficit figure could move quite quickly without much change in the assets that are backing it, or the profile of scheme members.

"If you're looking at debt on the balance sheet, you know what the ultimate repayment amount is. There's more ambiguity around pension payments. When there's a severe pension problem, you tend to find there are other challenges with the business." (1 US dollar = 0.6127 British pound) (Additional reporting by Carolyn Cohn; editing by David Clarke)