The Pensions Regulator has warned that the proposed takeover of British engineering company GKN by Melrose is likely to affect the company’s pension schemes.
In a letter to the Work and Pensions select committee, Lesley Titcomb, chief executive of TPR, said that the watchdog has concerns that “the increased leverage involved in the proposed takeover by Melrose is likely to have a detrimental impact on covenant”.
This would mean that the company resulting of the merger could have difficulties in funding the pension schemes.
Melrose, a firm known for buying industrial companies and turning them around, has offered £7.4bn for GKN.
The company has two pension funds - GKN Group Pension Scheme 2012 and GKN Group Pension Scheme 2016 - with more than 32,000 members.
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.
Ms Titcomb said that the regulator expects companies involved in any major transaction, such as a takeover, “to identify if there is potential material detriment to a pension scheme and explain how they will mitigate against that detriment”.
The watchdog has met with both companies and has “strongly encouraged Melrose to make a clearance application” to the regulator.
Ms Titcomb added that clearance will only be granted if the regulator considers “that sufficient mitigation has been provided to offset that material detriment”.
Melrose has argued that it has "a long track record of responsibly funding pension schemes" and said there was no cause for GKN pension members to be concerned.
Melrose also said it has offered to make a voluntary cash contribution of up to £150m into GKN's schemes when it first made a bid for the company.
Labour MP Frank Field, chair of the committee, argued that “pensioners would be surprised to know that a pension scheme could be offloaded to someone clearly less equipped or inclined to support it without the regulator having a say”.
He said: “A proportionate, mandatory clearance check as we recommended would be valuable in cases like this.
“Melrose claims an impeccable record in protecting pension rights. The surest way to demonstrate its commitment in this case would be to apply voluntarily for clearance.”
The trustees of the GKN schemes have previously warned to the impact of Melrose’s offer.