LONDON (Bloomberg) — The pension deficit at the UK's largest companies almost doubled to the highest in more than three years in June because of a drop in corporate bond yields, Aon Consulting Ltd. said.

The shortfall of the 200 biggest privately sponsored final salary pension plans widened to £73 billion ($119.4 billion) last month as corporate bond yields fell 40 basis points to 6.2 percent, Sarah Abraham, a consultant and actuary at Aon in London, said in a telephone interview yesterday. That compares with a deficit of £40 billion a month earlier.

"The increase will be quite shocking for the average finance director because people tend to think that when assets are doing OK their pension scheme position is going OK as well," said Abraham. "If you look back at how things used to be before the credit crunch in 2006 the deficit was generally at the 70 billion mark. The credit crunch made the accounts look quite good."

Pension liabilities are calculated by assuming asset values will rise in line with the yield on corporate bonds. A drop in bond yields indicates assets will grow more slowly forcing pension funds to hold more money to cover future payouts.

Pension funds have also faced losses from equity investments over the past two years, when the MSCI World Index fell 41 percent. The assets held by the UK pension plans have dropped about £50 billion, or 11 percent, to £400 billion since September 2007, Aon said.

Market losses and volatility have spurred pension funds, which are historically heavily invested in equities, to look for alternative investments. That may be exacerbated by changes to accounting legislation, due to be confirmed later this year, that may require pension funds to book returns on assets sooner and oblige them to offset losses by increasing their capital reserves.

Demand for products such as diversified growth funds may increase as pension funds seek alternatives to stocks, Aon said. Diversified funds allow for investments in equities as well as in hedge funds and property, "which should reduce the volatility of the portfolio as a whole", Aon said.

Though funds aren't actively selling equities, they have started delaying rebalancing their assets to restore benchmark equity allocations, Aon said. Most funds have as much as 10 percent less equities than their model portfolio suggests, Aon estimates.