Engineering giant GKN is toying with a rare fix for its £2bn pensions black hole — raising £250m of debt to pump into the schemes.
The FTSE 100 company, which makes wing tips for planes such as Boeing’s best-selling 737 short-haul jet, may issue bonds to help plug the gap.
Fixing GKN’s pension deficit could be a catalyst for the industrial heavyweight to do more deals, by bulking up either its aerospace or automotive arms. City sources believe it could even open the door to a break-up of the company. Last week it emerged that GKN was hunting for a new chief executive to replace Nigel Stein, who is expected to retire next year.
GKN’s possible pensions fix underlines the pressure heaped on big companies by historic retirement liabilities, which have swollen amid ultra-low interest rates. Companies ranging from BT to Tata Steel are also wrestling with deficits.
GKN has long been trying to fix its pensions problem, which is by far its biggest liability.
More than a decade ago it used some of the proceeds from the sale of Somerset helicopter maker Westland to shrink its deficit.
GKN recently removed a further £268m of liabilities with a £15m cash injection.
Last month GKN said its pension deficit was £2bn at the end of December, up from £1.6bn a year earlier, hurt by continued low rates, which dragged down the gilt yield relied on by pension funds. Of this £2bn liability, about £1.2bn relates to UK employees and pensioners, while a further £650m relates to its operations in Europe and is an unfunded liability — meaning pensions are paid for from cashflow.
GKN is in talks with trustees of its UK pension schemes about a three-year funding deal based on a new valuation of its schemes. However, that is expected to show a fresh calculation of £840m for the deficit in its UK pension schemes.
A one-off £250m cash injection could significantly reduce the annual cash drain on the company.
GKN, which has about 58,2000 staff, pays about £42m a year to plug its UK pension schemes’ deficit. A pensions experts said that using debt would be a relatively novel tactic to shrink a deficit.
However, the company is believed to be wary about pumping too much cash into its pension scheme, and has yet to decide on whether to raise the bond.
GKN, which has about £704m of debt, made profits of £292m last year and has a market value of about £6.4bn.
Fellow FTSE 100 engineer Smiths last year agreed a deal to plug its pensions black hole. That move freed it up to do deals, including a £493m swoop on Morpho, an airport scanners business bought from French engineering giant Safran.