The trustees of GKN Group's schemes have warned Melrose Industries about the pension funding position, following a bid to take over the business.
This comes after Melrose put together a strategy for GKN's two defined benefit (DB) pension schemes, including a plan to sell its £1bn powder metallurgy business, according to the FT.
Collectively, the schemes have around 32,000 members, of which 17,000 are current pensioners.
GKN has been lobbying its shareholders to reject Melrose's proposed takeover of the aerospace and automotive firm.
The trustees said that adjusted for a £250m company contribution made in October, the two schemes had an aggregate deficit on a gilt flat basis of £1.1bn. This would take the total cost of acquiring GKN to £8.5bn.
However, the cost of buying out all of the schemes' liabilities via an insurance company could cost around £1.9bn.
According to the trustees' statement on 16 January, any material change to the corporate and capital structure of GKN would lead them to "reassess the strength of covenant going forward and determine appropriate funding plans based on that covenant and its associated level of risk."
It further stated 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.
It concluded 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," and in any discussions, "the trustees' focus would be to safeguard members' interests."
Melrose has since announced the terms of its firm offer, valuing GKN's equity at £7.4bn, and each share at 430.1 pence.
Melrose's offer has not changed its original offer significantly, as it reflects a rise in its own share price since the original offer was made. As a result the implied premium has grown from approximately 24%, to approximately 32%.
Commenting on the potential implications for GKN's pension schemes, Xafinity Punter Southall principal Martin Hunter said:
"Takeovers aren't a black and white case of good or bad for a pension scheme. It's all about the nuances of the deal and what impact it has on the strength of the employer covenant."
He added the initial line from the trustees is very strong but most telling is what they have neglected to say.
"The lack of a deficit figure based on the current funding basis tells me that they're wary of any potential purchase of the company," he said. "Omitting that number suggests they view it as unlikely to be relevant under new ownership.
"That's probably because they expect a material injection of debt into the company, based on statements made to the market by Melrose. Doing so would substantially weaken the employer covenant.
GKN's DB pension schemes are closed to new members and to future accrual. Melrose has not yet confirmed whether it would continue with GKN's existing defined contribution plan or start a new one.
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