Melrose deal could harm GKN's retirement fund, warns pensions watchdog

The Pensions Regulator is concerned about the levels of debt involved in the takeover deal

GKN, which employs around 58,200 staff, has become a target after profit warnings in October and November (Reuters)

Melrose’s £7.4bn hostile swoop for GKN could have a detrimental impact on the engineering giant’s pensions scheme, according to the pensions watchdog.

The Pensions Regulator (TPR) said the levels of debt involved in the deal raised concerns about whether the Melrose would be able to service GKN’s £700m pension deficit.

In a letter to the Work and Pensions Select Committee, TPR called for Melrose to put the deal through the authority’s voluntary clearance system, a process which allows companies to seek the watchdog’s backing before a deal is complete.

Writing to committee chairman Frank Field, TPR chief executive Lesley Titcomb said: “From the outset we have been concerned that the increased leverage involved in the proposed takeover by Melrose is likely to have a detrimental impact on covenant.

“In any major corporate transaction, such as a takeover, we expect the companies involved to identify if there is potential material detriment to a pension scheme and explain how they will mitigate against that detriment.

“We would expect sufficient mitigation to be agreed with scheme trustees to ensure that a pension scheme is not placed in a worse position by any takeover.”

The committee has been calling for the voluntary clearance system to be made mandatory to ensure a pension scheme is not neglected when a deal is on the table.

Such a move would enable the TPR to oppose a deal at an earlier stage if it risks putting the retirement fund in jeopardy.

Mr Field urged Melrose to put the bid through voluntary clearance.

He said: “I think pensioners would be surprised to know that a pension scheme could be offloaded to someone clearly less equipped or inclined to support it without the regulator having a say.

“A proportionate, mandatory clearance check as we recommended would be valuable in cases like this.

“Melrose claims an impeccable record in protecting pension rights. The surest way to demonstrate its commitment in this case would be to apply voluntarily for clearance.”

The letter comes after GKN announced on Friday that it was in talks with US firm Dana over a potential merger of its automotive business.

The group has also firmed up the timings on Project Boost – its plan to persuade investors not to back Melrose’s bid – with a proposal to separate GKN Aerospace and GKN Driveline into two listed companies set for mid-2019.

GKN, which employs around 58,200 staff, has become a target after profit warnings in October and November following problems at its US aerospace division sent shares tumbling.

A Melrose spokeswoman said: “Melrose has consistently strengthened the pension scheme covenants of the businesses that it has acquired.

“Every time we have disposed of a business we have left the business free from deficit.”

“We have also stated that we will improve the position of GKN pensioners, making a £150m cash contribution to the GKN pension schemes.

“[The] Melrose model is about delivering operational improvements through investment and incentivising management teams.

“We use only modest levels of leverage but invest on average an additional amount equivalent to a third of the original equity purchase price into our businesses in order to strengthen and grow them for the benefit of all our stakeholders, including pensioners, employees, customers and shareholders.”

PA