* For graphic, see http://tmsnrt.rs/2jqaxav
* Three firms altered dividends or capital in 2016
* More expected to follow, FTSE 350 deficits trebled in 2016
* BT, Tesco , Balfour Beatty pension schemes under scrutiny
By Carolyn Cohn
LONDON, Jan 31 (Reuters) - More UK companies are expected to adjust capital or cut dividends to fill growing holes in final salary pension schemes this year.
The discovery of huge pension deficits at Tata Steel TISC.NS and collapsed retailer BHS in 2016 caused scandals and drew attention to the widening gap between the assets held by such schemes and the money they owe to pensioners.
British government bonds, or gilts, have been the main assets of defined benefit or final salary pension schemes. But years of low UK interest rates and a flight to safe-haven investments after Britain's June vote to exit the European Union have depressed yields, leaving shortfalls.
Several companies have taken steps in recent months to finance the deficits. Specialist plastics maker Carclo C1Y.L cut dividends, printing firm Communisis CMS.L reduced its capital base and fund manager Rathbone RAT.L raised capital. FTSE 100 company pensions schemes now only 88 percent funded as at Jan 27, 2017, according to consultant Aon's pension risk tracker, compared with 98 percent at end-2015, more companies are expected to follow suit.
The recent actions by the three small and mid-cap firms were "the tip of the iceberg," said Richard Farr, managing director at consultants Lincoln Pensions.
"Each year that goes by, the pensions mountain has not got smaller and companies are running out of time."
A pensions risk survey by Mercer shows an almost threefold increase in deficits in FTSE 350 companies in 2016.
BT BT.L , which has one of Britain's largest private sector final salary pension schemes, slashed its forecast for free cash flow last week, which consultants said could have a negative impact on the pension deficit. BT spokesman said: "BT remains a strong company that is able to make contributions into its pension scheme, pay shareholder dividends and invest in the future of the company."
Deficits on the balance sheet can also make companies less attractive to potential buyers.
A 2014 study by Llewellyn Consulting showed that a 100 pound ($124.77) increase in the reported pension deficit of a FTSE 100 .FTSE company would reduce the company's value by 160 pounds.
Tata Steel is trying to hive off its 15 billion pound UK pension scheme to clear the way for a merger between its European business and Germany's Thyssenkrupp TKAG.DE
The billionaire former BHS owner Philip Green is wrangling with regulators over funding for the 571 million pound pension scheme deficit of the company which collapsed with the loss of 11,000 jobs. He sold the loss-making department store chain last year to Dominic Chappell for one pound.
The case has put pressure on the pension regulator to be firm with companies with large pension deficits. A government Green Paper consultation on the topic is expected to be published in the next few weeks.
A committee in the lower house of parliament has called for fines for large companies which have not honoured contributions to their pension schemes, to act as a "nuclear deterrent".
Privatized companies running generous pension schemes left over from their days as state industries - such as BT BT.L - are particularly under scrutiny this year because of worries about their deficits, pensions consultants said.
A spokesman for Balfour Beatty pointed to a statement from last year which said the company had agreed with trustees a plan for the pension fund to reach self-sufficiency during 2027, three years ahead of the previous plan.
A spokesman for Tesco reiterated the guidance the company issued in October when it said it would not increase the size of its annual 270 million pound pension top-up payments agreed with trustees in 2015, despite its deficit jumping to 5.9 billion pounds, from 2.6 billion pounds in Feb 2016.
It also said then that it was relaxed about the rise, noting several options in the agreement with trustees, including changing the number of years it is due to make annual payments.
Some companies, including BT and Tesco, are due to carry out triennial reviews this year, which set out the level of cash they need to put in to plug deficits.
Fifteen-year gilt yields GB15YT=RR , a proxy measure for funding levels according to pensions specialists, have nearly halved since 2014 valuations.
Yields have risen in recent weeks. But UK inflation has also risen and is expected to climb further. This could wipe out any gains because annual pension increases are inflation-linked, said Charles de Boissezon, co-head of European equity strategy at Societe Generale (PA: SOGN ) in Paris.
"As yields pick up, a lot of people think the pension deficit will fade away," de Boissezon said. "What they missed is the importance of inflation picking up, which is a negative for pension positions."
($1 = 0.8015 pounds)
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