GKN warns pension trustees over Melrose approach

GKN has launched its latest offensive against its potential suitor Melrose by trying to convince pension trustees that the approach could have a damaging effect on pension arrangements.

In a statement, GKN said it had a constructive working relationship with the pension trustees, despite their independence, which had been developed over many years.

The Redditch-based group said the level of debt being proposed by Melrose was higher that GKN leverage as concluded at the end of June last year.

It said: “Melrose has stated that they expect, in the event of their offer completing, the combined group would have net leverage in line with approximately 2.5x EBITDA; a level materially higher than the company’s (GKN) leverage level of 0.6x as at 30 June 2017,” it said.

“This may have implications for the covenant strength of the company, the level of the technical provisions deficit and therefore the level of immediate and/or long term cash funding requirements.”

Melrose’s latest bid for the GKN group stands at £7.4bn, a figure GKN has rejected because it claims the bid substantially undervalues the company.

During 2017, the GKN Group Pension Scheme 2012 was closed to future accruals. Also in 2017, a one-off contribution of £250m was paid into that scheme, and annual cash contributions to pay off the actuarial deficit were reduced from £42m in 2017, to £36m in 2018, as part of the triennial valuations.

GKN Investments makes annual distributions of £30m to the 2012 scheme; this is included within the £36m cash contribution figure. The agreed payments from GKN Investments are expected to continue until 2031, but may end earlier if investment or actuarial experience is better than is being assumed in the deficit calculations.

In some circumstances payments into the schemes could extend beyond 2031, said GKN.

It added: “The technical provisions deficit of £0.4bn (excluding the value of GKN Investments) ordinarily determines the cash payments from GKN into the schemes. Because this number drives the recurring free cash flow impact on GKN it is the critical number from the company’s perspective.

“The technical provisions are dependent on a range of actuarial assumptions and on the expected returns on the schemes’ assets, which are in turn dependent on the investment strategy of the schemes. The investment strategy of the schemes is set by the schemes’ trustees, taking independent third party advice, and taking into account the strength of the GKN covenant.

“The trustees consult with the company on investment strategy but their primary obligation is to their members. The company has been supportive of the trustees’ efforts to manage risk, which includes changes to the investment strategy and liability management that will serve to reduce volatility in the schemes’ funding position over the long term.”

GKN said its covenant strength was critical to investment strategy and the technical provisions. The covenant was assessed at the “high end of good” during the last triennial valuations.

“An adverse change in covenant strength would be expected to increase the technical provisions deficit,” it added.