GKN has announced plans to make a cash contribution of £160m into its defined benefit (DB) pension schemes as part of demerger plans designed to fend off a hostile takeover by Melrose Industries.
The FTSE 100 engineering firm plans to separate its GKN Driveline and GKN Aerospace businesses via a demerger, to be completed in the middle of 2019.
In an update released on 2 March, GKN said it had agreed to progress with demerger discussions with the trustees of its UK pension schemes - highlighting its intention to make a financial contribution of approximately £160m should the demerger go ahead.
Leading up to the split, GKN said it would also continue "to work with the trustees in exploring and implementing, as appropriate, other liability management exercises in relation to the UK pension schemes".
However, the company said it had not yet reached a legally binding agreement with the trustees.
Commenting on GKN's announcement Xafinity Punter Southall principal Martin Hunter said the demerger presents an issue for the trustees of its pension schemes. At the moment they are supported by the company as a whole, but a split would weaken the covenant.
Hunter said: "Because of the loss of access to the other part of the business, the payment of £160m would ensure that its position is no worse than was before the demerger.
"While none of the details are in the statement, I would guess it's only one of the two businesses which would end up taking the pension schemes."
He added: "While the Melrose takeover would mean the business stay as one, it would have a lot more debt.
"While Melrose shareholders say that's not the whole picture, the hostile nature of the takeover means they do not yet have access discuss this with trustees."
Also commenting on the announcement AJ Bell senior analyst Tom Selby, said: "Clearly any demerger exercise involving a company with DB liabilities opens questions about who should take responsibility for the pension scheme and how will it be funded.
"I'm sure the regulator will be keeping a keen eye on this case to ensure members are appropriately protected."
The engineering giant has made it very clear it plans to demerge by mid- 2019, in a bid to fend off the hostile £7bn approach from Melrose Industries.
The news follows a warning from the engineering giant in January that the proposed £7.4bn takeover could increase its £1.1bn pension deficit.
Melrose proposed a strategy for GKN's two DB pension schemes, including a plan to sell its £1bn powder metallurgy business, but GKN's board rejected the takeover offer while the trustees of the GKN Group Pension Scheme 2012 and GKN Group Pension Scheme 2016 warned Melrose about the pension funding position.
While its trustee originally questioned the ability of Melrose to protect the long-term interests of its members, the company's announcement to potentially split the business has raised different challenges from a covenant protection perspective.
GKN's DB pension schemes have closed to new members and to future accrual. Collectively, its schemes have around 32,000 members, of which 17,000 are current pensioners.
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