Any potential buyer of British engineering company GKN should be aware of a pension deficit over £1bn, the scheme trustees said yesterday (16 January).
The statement comes after Melrose, a firm known for buying industrial companies and turning them around, appealed directly to investors to back a £7.4bn offer for GKN.
Trustees of the two pension funds of the company - GKN Group Pension Scheme 2012 and GKN Group Pension Scheme 2016, with more than 32,000 members – said that any material change to the corporate and capital structure of GKN would lead to a reassessment of the strength of covenant between it and the pensions going forward.
The trustees would also need to “determine appropriate funding plans based on that covenant and its associated level of risk,” they added.
At the end of September, the GKN schemes had an aggregate deficit on a gilts flat basis of £1.1bn, and an aggregate deficit on a solvency basis of £1.9bn.
The gilts flat basis is an indication of the funding position if the GKN schemes were invested entirely in gilt assets, which is a commonly used yardstick in the pensions industry for measuring the potential cost of a pension scheme.
The solvency basis refers to the estimate of the cost of buying out the GKN schemes’ liabilities with an insurance company.
The trustees said: “Given the scale of the above deficits, the schemes are very substantial stakeholders in the business with a significant level of reliance on the strength of the GKN covenant.
“The trustees expect full engagement with management and with any relevant third parties, at the appropriate time, to ensure satisfactory protection and mitigation for any impacts arising from any change in the strategic direction or future ownership of the company.
“In any discussions, the Trustees’ focus would be to safeguard members’ interests.”
If the unsolicited offer goes forward, the trustees might ask for new funding from the new company.
This is not the first time that a pension fund is the eye of acquisition talks.
The separation of the British Steel Pension Scheme (BSPS) from Tata Steel UK (TSUK) was considered to be last hurdle stopping a merger of the group’s European steelmaking operations with those of German rival ThyssenKrupp, a deal that is now going forward.
In August, TSUK got the go-ahead to offload the scheme and create a new defined benefit (DB) fund, after the regulator gave its formal approval to a regulated apportionment arrangement (RAA).
Steelworkers had until 22 December to decide whether to move their DB pension pots to a new plan being created, BSPS II, or stay in the current fund, which will be moved to the PPF.
The scheme has about 130,000 members of which 43,000 are deferred, which means transferring out of their pension is an option for them.
FTAdviser reported in November that several steelworkers appeared to be transferring out their pensions after being lured by cheap deals by unregulated introducer firm Celtic Wealth Management & Financial Planning, which then referred the clients to advice firm Active Wealth.
Following intervention from the Financial Conduct Authority (FCA), eight firms have decided to stop providing advice on pension transfers.
maria.espadinha@ft.com
