January 16, 2018 / 3:31 PM / a year ago

GKN pension trustees say any potential buyer faces big pension deficit

Jan 16 (Reuters) - Any buyer of British engineering company GKN should be aware of its sizeable pension deficit, GKN’s pension trustees said on Tuesday, a day after Melrose appealed directly to GKN investors to back its 7 billion pound takeover offer.

Last week GKN said it had rebuffed a 405 pence per share cash-and-stock offer from Melrose made on Jan 8, as it set out plans to split its aerospace and automotive businesses.

On Monday GKN indicated it would stand by this rejection. However, it is facing pressure from U.S. activist investor Elliott Advisors to open talks with Melrose.

The GKN trustees said in a statement the pension schemes had an aggregate deficit at end-September on a so-called gilts flat basis of 1.1 billion pounds ($1.51 billion) and on a solvency basis of 1.9 billion pounds.

The gilts flat basis is an indication of the funding position if the GKN pension schemes were invested entirely in gilt assets, a commonly used yardstick in the pensions industry.

Solvency basis refers to the cost of asking an insurance company to manage a scheme and its deficit if it took them over.

The trustees added that the schemes were very substantial stakeholders in GKN, with “a significant level of reliance on the strength of its covenant”.

The covenant is an employer’s legal obligation and financial ability to support its defined benefit scheme now and in the future. The trustees can ask for more money or some other asset to strengthen the covenant.

“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 trustees said in their statement.

The schemes comprise 5,105 active employees, 9,899 deferred members and 17,333 pensioners.

A spokeswoman for Elliott declined to comment on Tuesday’s statement from the trustees.

$1 = 0.7268 pounds Reporting by Noor Zainab Hussain in Bengaluru, additional reporting by Maiya Keidan in London; editing by Gareth Jones

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