Regulatory
intervention report
Issued in relation to the GKN PLC Pension Schemes
March 2019
Regulatory intervention report GKN PLC Pension Schemes
Case summary
We saw a number of high prole mergers and acquisitions in 2018, one
of which was the takeover of GKN by Melrose. The purpose
of this regulatory intervention report is to highlight to trustees,
employers and advisers how we expect to work with parties where
there is a takeover or acquisition and a dened benet pension (DB)
scheme involved.
Illustrated summary
-£1.4bn
Combined decit of
pension schemes
29 March 2018
Shareholders vote in
favour of Melrose bid
Yes
No
£1bn
Up to £1bn funding for the
pension schemes during
Melrose ownership
£
2
Regulatory intervention report GKN PLC Pension Schemes
Background
GKN PLC (GKN) is a global engineering group which was, at the time of the takeover bid,
listed on the London Stock Exchange. GKN has various divisions, including GKN Aerospace,
GKN Driveline and GKN Powder Metallurgy.
GKN has two UK-based DB pension schemes – GKN Group Pension Scheme 2012 and GKN
Group Pension Scheme 2016. The schemes have a combined membership of over 32,000
members. The schemes’ combined decit was around £1.4bn based on a gilts at basis
1
and
£2.2bn on a solvency basis
2
.
Melrose Industries PLC (Melrose) is a company also listed on the London Stock Exchange.
Melrose aims to create signicant gains by buying companies and increasing the value
of the businesses that it owns through substantial investment. Its stated strategy is “Buy,
Improve, Sell”.
In January 2018, Melrose offered to buy each existing GKN share for a cash payment of 81p
and 1.49 shares in Melrose (equating to £7.4bn at 17 January 2018 prices). The share portion
of this offer was subsequently increased from 1.49 shares to 1.69 shares on 13 March 2018 –
valuing GKN at £8.1bn. The cash part of the bid would largely be nanced by increasing debt,
resulting in GKN having potential liability for materially more debt after the takeover. The bid
included a proposal to make an initial payment of £150m to the GKN pension schemes.
The bid was not recommended by the existing GKN management and so went ahead on
a hostile basis. GKN management sought to prevent the hostile takeover and presented
its plans for the GKN group to shareholders on 14 February 2018. A subsequent proposal
was announced in early March to merge its Driveline business with Dana Incorporated, a
US-based business. Alongside these announcements, GKN management agreed with the
trustees a package of support for the schemes which would apply if the Melrose takeover
bid was unsuccessful.
Shortly after the announcement of Melrose’s takeover bid on 12 January 2018, the trustees
of the two schemes acted promptly and made a joint statement to the market. This
highlighted their aggregate funding level and noted that any change to the corporate and
capital structure of GKN would lead the trustees to reassess the strength of covenant and
funding requirements.
We consider that this statement was a positive factor in ensuring that the trustees were
able to agree a funding package with both GKN and Melrose.
Ahead of the nal GKN shareholder vote on Melrose’s takeover proposal, Melrose’s
management agreed a package of future support for the schemes. This included
agreement to fund the schemes more prudently. Melrose agreed cash contributions
of up to £1bn to fully fund the schemes on the revised funding basis, including one off
contributions to be paid when businesses within the group are sold.
1 A gilts at basis is a measure of the funding required to pay benets in full which aims to limit reliance on
the continuing support of the sponsoring employer.
2 All GKN decit numbers are quoted excluding the GKN Investments LLP asset of £0.3bn, in order to be
consistent with the Melrose basis of calculating the decit and the total cash contributions required.
3
Regulatory intervention report GKN PLC Pension Schemes
Regulatory action
The hostile bid and the defence plan by the existing GKN management meant that either
Melrose would acquire GKN or changes would be implemented by the existing ownership.
Both would have a signicant impact on the position of the scheme. We were very
clear that in either scenario, mitigation to manage the possible impact on the security of
members’ benets would be needed.
As soon as we became aware of the possible takeover of GKN by Melrose, we contacted
the management of both companies setting out our concerns about the potential impact
on the schemes, and subsequently met with representatives of both companies and with
the trustees of both schemes.
Given the importance of the pension schemes as nancial stakeholders and the public
nature of the takeover battle, our involvement quickly became public.
We continued to communicate with the trustees as well as both Melrose and GKN’s
management separately before plans for the schemes were agreed between each company
(separately) and the schemes’ trustees. We wanted to understand how the schemes could
be affected depending on whether the hostile takeover succeeded or not, and to ensure
that any material detriment to the schemes would be appropriately mitigated.
There were calls from MPs, regulators and the press for Melrose to apply for formal
clearance of the transaction, but it chose not to do so. Clearance is a voluntary process,
and was included in the Pensions Act 2004 to provide comfort to companies engaging
in corporate transactions which are likely to cause material detriment. It exists to address
their concerns that our powers might otherwise deter companies from engaging in normal
corporate activity. Although we encourage applications for clearance in these situations, it
is for the parties involved to make that decision. The benet of clearance is that, if we have
been given full disclosure of all relevant facts, it provides certainty that we will not use our
powers at a later date.
Outcome
The robust approach taken by the trustees of the GKN schemes, supported by prompt
engagement by TPR with our expectations clearly set out, meant that both GKN and
Melrose provided details of their plans and engaged with the trustees to agree mitigation
for the changes in covenant resulting from the acquisition.
On 29 March, GKN shareholders voted in favour of Melrose’s proposal – with the GKN
companies now forming part of the enlarged Melrose group. Since the takeover took effect,
we have continued to discuss the implementation of the agreed plans for the schemes with
the trustees and with Melrose.
4
Regulatory intervention report GKN PLC Pension Schemes
Our approach
In situations where a transaction is likely to have a signicant impact on the employer’s
ability to support a DB pension scheme, we are likely to communicate with involved
parties to ensure that appropriate steps are taken to understand and mitigate any material
detriment to the schemes, with the aim of protecting members’ benets.
In the case of a transaction, we will consider the merits of investigating in detail whether
the use of our anti-avoidance powers such as Contribution Notices or Financial Support
Directions
would be justied. We are likely to open an investigation if we are not satised
that appropriate arrangements have been made to mitigate any potential material
detriment caused by the transaction.
3
Where the parties to a transaction choose not to come to us for clearance (as was the case
for the Melrose bid for GKN), we can open an investigation at a later stage if we consider it
appropriate. If the companies want greater certainty about the use of our powers, they can
apply for clearance where appropriate
4
.
We expect to be notied as soon as practicably possible about any potential transaction
affecting a company or group that has a DB pension scheme attached. We routinely
engage with condential, price sensitive information and the sensitive nature of takeover
discussions should not be a bar to discussing these situations with us. We are aware of
the restrictions imposed by the takeover code for transactions which fall within the scope
of that code, but would expect offerors to give careful consideration to whether the
pension issues are sufciently material to require early involvement of the pension trustees
and the regulator.
Throughout the negotiation process, we may meet with stakeholders, including pension
scheme trustees and management of companies involved, to ensure that they are taking
appropriate advice and making a full assessment of any impact on their pension schemes.
3 For information about our anti-avoidance powers go to:
https://www.tpr.gov.uk/en/about-us/how-we-regulate-and-enforce/anti-avoidance-powers
4 For information about our clearance process go to:
https://www.tpr.gov.uk/en/document-library/regulatory-guidance/clearance
5
Regulatory intervention report GKN PLC Pension Schemes
Timeline
12 January 2018: Media report of a hostile takeover bid of GKN by Melrose.
15 January 2018: TPR emails the trustees of both schemes.
16 January 2018: Trustees respond to TPR along with statement issued to the media.
22 January 2018: TPR requests meeting with trustees to discuss interaction between
trustees and GKN as well as advice received and protections in place for the scheme.
30 January 2018 – March 2018: Regular meetings, calls and correspondence with
trustees, companies and advisers about the proposals and setting out clearance process.
14 February 2018: GKN presents defence strategy to the market.
6 March 2018: Business, Energy and Industrial Strategy (BEIS)
Committee Evidence Session.
9 March 2018: GKN announces plans for the schemes.
19 March 2018: Melrose announces plans for the scheme.
28 March 2018: TPR writes to Melrose setting out expected ways of working going
forward if the bid is successful.
29 March 2018: Shareholders vote in favour of Melrose.
6
The regulator’s consideration and approach to individual cases is informed by the specic
circumstances presented by a case, not all of which are referred to or set out in this summary report.
This summary report must be read in conjunction with the relevant legislation. It does not provide a
denitive interpretation of the law. The exercise of the regulator’s powers in any particular case will
depend upon the relevant facts and the outcome set out in this report may not be appropriate in other
cases. This statement should not be read as limiting the regulator’s discretion in any particular case to
take such action as is appropriate. Employers and other parties should, where appropriate, seek legal
advice on the facts of their particular case.
Regulatory intervention report: GKN PLC Pension Schemes
©The Pensions Regulator March 2019
www.tpr.gov.uk
You can reproduce the text in this publication as long as you quote The Pensions Regulator’s name and title of
the publication. Please contact us if you have any questions about this publication. This document aims to be
fully compliant with WCAG 2.0 accessibility standards and we can produce it in Braille, large print or in audio
format. We can also produce it in other languages.
