GKN elaborates on pension deficit claims

GKN looked to clear up a dispute over its pensions deficit on Monday as it battles to stave off a hostile takeover from smaller rival Melrose Industries, following reports the shortfall could be a potential 'poison pill'.

The automotive and aerospace parts manufacturer, which also expressed concerns about the potential effects of higher net debt on its banking covenants, said its group pension scheme's accounting deficit at the end of December could be calculated as low as an actuarial deficit of £0.4bn or as high as £1.4bn if gilt yields remain flat.

If calculated according with international accounting standards, the deficit would stand at around £0.7bn, being the amount of money needed, in excess of the assets, so that the estimated pension benefits could be paid to all scheme members if all of the scheme assets were to be invested in high quality corporate bonds.

Last week, GKN’s pension trustees issued a surprise warning that the deficit, which is the market value of its assets less the value of its liabilities, should be prioritised in the event of any change of control of the company, or break up of the FTSE 100 group.

This intervention cast doubt on the size of GKN’s pension deficit, with the trustees putting it at £1.1bn and new finance director Jos Sclater reportedly telling investors the deficit was £400m and that the trustees’ larger claim was based on gilt yields staying flat.

GKN on Friday was reported to dismiss the £400m figure, saying it was speculation based on a future increase in gilt yields, with the true deficit actually nearer £850m at current bond rates.

On Monday, GKN provided an update on the schemes, setting out the size of its liabilities, the the deficit before including the value of its GKN Investments LP vehicle and excluding it, all "calculated using a number of commonly used methods for measuring pension liabilities and deficits".

GKN noted that 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," it explained. "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."

GKN said the trustees regularly consulted with the company on investment strategy "but their primary obligation is to their members", adding that 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£.

The company added a warning about debt, noting that Melrose has anticipated the combined group would have net leverage in line with approximately 2.5 times EBITDA versus leverage level it said was 0.6 times EBITDA at the end of last June.

"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."