Defined Benefit  

Melrose agrees £1bn deal with GKN pension trustees

Melrose agrees £1bn deal with GKN pension trustees

Industrial firm Melrose has reached an agreement with British engineering company GKN trustees to fund its pension schemes up to £1bn.

This development is expected to remove a hurdle to the £7.4bn hostile takeover of the FTSE company.

Melrose plan to fund GNK defined benefit (DB) schemes consists on an initial £150m payment and a doubling of annual contributions to £60m for one of the plans, along with an "agreed formula" for contributions from the proceeds of disposals.

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.

Pensions have emerged as one of the key battlegrounds in the fight over GKN, with the scheme trustees warning Melrose about the pension funds shortfalls.

The Pensions Regulator has been watching the negotiations closely, strongly encouraging Melrose to make a clearance application to the watchdog.

In the meantime, GKN has rejected the Melrose bid, and instead pledged to sell its automotive business to US group Dana in a $6bn (£4.3bn) transaction.

According to Christopher Miller, Melrose chairman, the agreement with the trustees "is another concrete example of Melrose's exemplary track record with pension schemes and its desire to look after all stakeholders".

He said: "This agreement would significantly improve the position of the members of GKN's pension schemes and is in line with our original plans for the business. We are delighted to secure another important step in our offer to buy GKN."

maria.espadinha@ft.com