GKN offer and the response from the companies schemes’ trustees
17 / 01 / 2018
Final salary funding deficits are all around us and they cause headaches for a number of people, not least:
- pension scheme members who worry about the security of their retirement income;
- employers who have to direct hard earned cash towards schemes to plug significant funding deficits;
- trustees who are responsible for managing poorly funded schemes; and
- investors keen on acquiring companies which happen to be straddled with significant pension scheme liabilities.
The recent bid by Melrose, a mid-cap turnaround company, highlighted several of these headaches when its offer of around £8bn to acquire GKN attracted a very public response from the trustees of the FTSE-100 target’s pension schemes. Combined, GKN’s schemes have over 32,000 members and a funding deficit, on a gilts flat basis, of £1.1bn. Certainly not sums to be sniffed at.
It appears that the trustees of GKN’s schemes got in very early with their warning that the schemes have significant funding liabilities and any potential purchaser needs to be aware of that and have a viable plan to address the issue.
We often hear in the news of parties making significant progress in relation to proposed acquisitions, only for them to fall apart because of the pension deficit. Sainsbury’s is a key example of this. In order to avoid this happening it is essential to:
- involve trustees as early as possible; and
- appoint advisers who are going to have a joined-up approach and ensure all potential deal breakers are identified and considered at the outset.
In fact, we are increasingly seeing clients approaching sales/acquisitions with a very clear and logical approach, often considering, at a very early stage, the Takeover Code, applying for Clearance from the Pensions Regulator, and lining up the apportionment of a subsidiary’s pension liabilities to another group company before marketing it to prospective buyers, as they are all too aware of the impact a sizable pension deficit can have on prospective sales. Such an approach requires the employer to get the trustees on board and may result in difficult questions regarding employer covenant being raised (something the trustees are obliged to consider as part of their fiduciary duties, and also as a statutory duty in relation to a formal apportionment arrangement). Indeed, covenant is one of the points which the GKN trustees cited as a concern in relation to Melrose’s recent offer:
“Any material change to the corporate and capital structure of GKN would lead the trustees to reassess the strength of covenant going forward and determine appropriate funding plans based on that covenant and its associated level of risk.”
The GKN trustees appear to be very knowledgeable and proactive. Indeed, if press reports are to believed, the trustees seem to have a good relationship with the employer and managed to secure £250m worth of funding in 2017 as part of the negotiations surrounding closure to accrual. Melrose have rebuffed the trustees, saying they are aware of the pension liabilities and their offer had taken the liabilities into account, and GNK has said it will instead split itself up and make efforts to improve performance. Splitting itself up may not be the easiest approach though, depending on how the pension liabilities are attributed. We can’t help but feel there may be more headlines relating to GKN as 2018 develops.