GKN : Pensions Update

LEI: 213800QNZ22GS95OSW84

NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION IN WHOLE OR IN PART, DIRECTLY OR INDIRECTLY, IN, INTO OR FROM ANY JURISDICTION WHERE TO DO SO WOULD CONSTITUTE A VIOLATION OF THE RELEVANT LAWS OR REGULATIONS OF THAT JURISDICTION.

29 January 2018

GKN plc ('GKN' or the 'Company')

Pensions Update

GKN provides an update relating to its UK pension schemes (the 'Schemes') and sets out below certain pension related financial information calculated using a number of commonly used methods for measuring pension liabilities and deficits. Please see the 'Notes to editors' at the bottom of this announcement for an explanation of each of the deficits calculated using these methods. The liability and deficit figures use market conditions at the dates shown in the 'Notes to the pension related financial information'.

	2017				2016
Method	Liability	Deficit (incl. the value of GKN Investments LP)	Value of GKN Investments LP1	Deficit (excl. the value of GKN Investments LP)	Deficit (excl. the value of GKN Investments LP)
Section 75	£4.9bn	£1.9bn	£0.3bn	£2.2bn	N/A
Gilts Flat	£4.0bn	£1.1bn	£0.3bn	£1.4bn	N/A
Accounting Deficit	£3.3bn	N/A2	N/A	£0.7bn	£1.2bn
Actuarial Deficit (technical provisions)	£3.0bn	£0.1bn	£0.3bn	£0.4bn	£0.7bn

During 2017, the GKN Group Pension Scheme 2012 was closed to future accruals. Also in 2017 a one-off contribution of £250m was paid into that Scheme, and annual cash contributions to pay off the actuarial deficit were reduced from £42m in 2017, to £36m in 2018, as part of the triennial valuations. GKN Investments LP makes annual distributions of £30m to the 2012 Scheme; this is included within the £36m cash contribution figure. The agreed payments from GKN Investments LP are expected to continue until 2031, but may end earlier if investment or actuarial experience is better than is being assumed in the deficit calculations. In some circumstances payments into the Schemes could extend beyond 2031.

The technical provisions deficit of £0.4bn (excluding the value of GKN Investments LP) 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. 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. The investment strategy of the Schemes is set by the Schemes' Trustees (the 'Trustees'), taking independent third party advice, and taking into account the strength of the GKN covenant. The Trustees consult with the Company on investment strategy but their primary obligation is to their members. 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.

GKN's covenant strength is critical to investment strategy and the technical provisions. The covenant was assessed at the 'high end of good' during the last triennial valuations. An adverse change in covenant strength would be expected to increase the technical provisions deficit. The strength of the covenant is determined by the Trustees following advice by their covenant advisor and, amongst other things, is a reflection of the financial strength of the Group and its long term strategy.

The figures contained within the Trustees announcement released on 16 January 2018 outlined the sensitivity of the technical provisions deficit to the Trustees' view on GKN's covenant strength. The Trustees also highlighted what the Gilts Flat deficit was at the date of the latest funding update.

The Accounting Deficit of £0.8bn referred to in the Trustees' announcement was as at 30 June 2017, adjusted for the lump sum contribution of £250m from the Company received in October 2017, and can be directly compared to the £0.7bn Accounting Deficit outlined in the table above which was as at 31 December 2017.

The Company has a constructive working relationship with the Trustees, which has been developed over many years and was important in enabling the changes made to the Schemes and their funding requirements, as set out above. Notwithstanding this, the Company emphasises that the Trustees are wholly independent and have a legal duty to take into account Scheme members' interests, taking advice from their own third party professional advisors. Furthermore, given the size of the Schemes' pension liabilities, the Pensions Regulator has proactively engaged with both the Trustees and the Company during the last two triennial valuations, providing regulatory oversight.

Melrose has stated that they expect, in the event of their offer completing, the combined group would have net leverage in line with approximately 2.5x EBITDA; a level materially higher than the Company's leverage level of 0.6x³ as at 30 June 2017. 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.

The Company also operates a number of pension schemes outside of the UK, most notably in Germany and the US. In common with many companies within Germany, GKN operates unfunded arrangements where pensions are paid directly by the employing company with no separate assets to back the liabilities. The liabilities of these plans on an accounting basis are approximately £0.6bn. GKN operates a historic funded defined benefit plan in the US with an accounting deficit of less than £0.1bn.

Notes to editors

The deficit in a pension scheme is the market value of its assets less the value of its liabilities.

There are a number of commonly used methods for measuring pension liabilities and deficits. Four such methods are described below:

Section 75 Deficit:This is an estimate calculated on a statutory basis by the trustee's actuary of theamount of money (in excess of the scheme assets) needed to buy an insurance policy. (If an insurance policy is bought the insurance company becomes responsible for making all future pension payments to scheme members.) Should an employer leave a scheme where there are several employers (for example on the sale of a business) the employers share of this figure would generally be payable and is known as the Section 75 debt, although alternative arrangements can be agreed with the trustees.

Gilts Flat Deficit:This measure is commonly used in the pensions industry to illustrate the level of assets required so that the scheme would become largely self-sufficient. It assumes that the scheme invests only in UK Government bonds.

Accounting Deficit (also known as the IAS 19 deficit):The figure that is shown in the Company's accounts and is calculated in accordance with international accounting standards. It is 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 (AA-rated) corporate bonds.

Actuarial Deficit (technical provisions):The expected cost (in excess of the existing assets) of providing the future pension benefits determined by the trustees using cautious assumptions. It takes account of the expected return of the scheme's assets and the strength of the employer covenant.For stronger companies it is generally acceptable to allow for more investment income from the scheme's assets which results in a lower technical provisions deficit.

Notes to the pension related financial information

i. The Section 75, Gilts Flat and Actuarial Deficit (technical provisions) information included in the table at the beginning of this announcement (the 'Information') was prepared for the Trustees by Mercer as Scheme Actuary to the Schemes for the purpose of their monitoring of the Schemes' funding levels. The Information is illustrative as it is based on approximate funding updates and should not be considered as accurate as if it had been produced from full actuarial valuations.

ii. The assumptions used to estimate the Section 75 valuation are based on Mercer's estimate of the cost of buying out the Schemes' liabilities with an insurance company at the relevant date but in practice the actual terms available are likely to be different.

iii. Asset values presented 'at 30 September 2017' include the value of the 2012 Scheme Trustee's interest in GKN Investments LP (c.£0.3bn as at 30 September 2017) and an additional £0.25bn to reflect a cash lump payment made into the 2012 Scheme in October 2017.

iv. The Information was produced solely for the Trustees' use to meet their specific purposes and was not designed to form the basis of any decisions by any other party. Any other party referring to the Information is responsible for their own understanding and interpretation of the Information. Accordingly, Mercer accepts no liability to any other party and should any other party choose to use and/or rely upon the Information they do so entirely at their own risk.

v. The Accounting Deficit figures are included on an unaudited basis and therefore are an approximation within a range of £0.1bn.

vi. The 2017 financial information relating to the Section 75, Gilts Flat and Actuarial Deficit (technical provisions) is as at 30 September 2017. The 2017 financial information relating to the Accounting Deficit is as at 31 December 2017.

vii. The 2016 financial information relating to the Accounting Deficit and Actuarial Deficit (technical provisions) is as at 31 December 2016.

Other notes

¹ GKN Investments LP exists to improve the security of funding into the two GKN Group pension Schemes and is an asset-backed cash payment arrangement, which represents a c.£0.3bn plan asset as at 30 September 2017. The accounting for GKN Investments LP is complex. From an Accounting Deficit perspective the value of GKN Investments LP has to be excluded. Conversely, the Trustees include the value of the plan asset when they calculate the Section 75, Gilts Flat and Actuarial Deficit (technical provisions) but GKN looks through the value of the plan asset when it considers the Section 75, Gilts Flat and Actuarial Deficit (technical provisions) because the plan asset is not relevant to the cash demands of the Schemes on the Company.

² This figure is not available as the Accounting Deficit must exclude the value of GKN Investments LP to comply with accounting standards.

³ GKN net debt / EBITDA of 0.6x as stated in GKN's results announcement for the six months ended 30 June 2017.

Certain figures included in this announcement have been subjected to rounding adjustments. Accordingly, figures shown for the same category presented in different columns may vary slightly and figures may not be an arithmetic aggregation of the figures that precede them.

Contacts:

GKN plc

Guy Stainer, Investor Relations Director

Tel: [phone]

FTI Consulting

Andrew Lorenz / Richard Mountain

Tel: [phone]

Gleacher Shacklock (Financial Adviser to GKN)

Tim Shacklock, Dominic Lee, Tom Quinn

Tel: [phone]

J.P. Morgan Cazenove (Financial Adviser and Corporate Broker to GKN)

Robert Constant, Dwayne Lysaght, Stephen Smith

Tel: [phone]

UBS (Financial Adviser and Corporate Broker to GKN)

Hew Glyn Davies, James Robertson, Jonathan Retter

Tel: [phone]

Further information

This announcement is not intended to, and does not, constitute or form part of any offer, invitation or the solicitation of an offer to purchase, otherwise acquire, subscribe for, sell or otherwise dispose of, any securities whether pursuant to this announcement or otherwise.

The distribution of this announcement in jurisdictions outside the United Kingdom may be restricted by law and therefore persons into whose possession this announcement comes should inform themselves about, and observe, such restrictions. Any failure to comply with the restrictions may constitute a violation of the securities law of any such jurisdiction.

Gleacher Shacklock LLP ('Gleacher Shacklock'), which is authorised and regulated by the Financial Conduct Authority in the United Kingdom, is acting exclusively as financial adviser to GKN and no one else in connection with the matters set out in this announcement and will not be responsible to anyone other than GKN for providing the protections afforded to clients of Gleacher Shacklock or for providing advice in connection with the subject matter of this announcement or any other matter referred to herein.

J.P. Morgan Securities plc (which conducts its UK investment banking business as J.P. Morgan Cazenove) ('J.P. Morgan Cazenove') is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority in the United Kingdom. J.P. Morgan Cazenove is acting exclusively as financial adviser to GKN and no one else in connection with the matters set out in this announcement and will not regard any other person as its client in relation to the matters set out in this announcement and will not be responsible to anyone other than GKN for providing the protections afforded to clients of J.P. Morgan Cazenove or its affiliates, nor for providing advice in relation to any matter referred to herein.

UBS Limited ('UBS') is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority in the United Kingdom. UBS is acting exclusively as financial adviser to GKN and no one else for the purpose of the consideration of a proposed acquisition by Melrose and will not be responsible to anyone other than GKN for providing the protections offered to clients of UBS nor for providing advice in relation to the subject matter of this announcement or any transaction, arrangement or other matter referred to herein.

Disclosure requirements of the Code

Under Rule 8.3(a) of the Code, any person who is interested in 1% or more of any class of relevant securities of an offeree company or of any securities exchange offeror (being any offeror other than an offeror in respect of which it has been announced that its offer is, or is likely to be, solely in cash) must make an Opening Position Disclosure following the commencement of the offer period and, if later, following the announcement in which any securities exchange offeror is first identified. An Opening Position Disclosure must contain details of the person's interests and short positions in, and rights to subscribe for, any relevant securities of each of (i) the offeree company and (ii) any securities exchange offeror(s). An Opening Position Disclosure by a person to whom Rule 8.3(a) applies must be made by no later than 3.30 pm (London time) on the 10th business day following the commencement of the offer period and, if appropriate, by no later than 3.30 pm (London time) on the 10th business day following the announcement in which any securities exchange offeror is first identified. Relevant persons who deal in the relevant securities of the offeree company or of a securities exchange offeror prior to the deadline for making an Opening Position Disclosure must instead make a Dealing Disclosure.

Under Rule 8.3(b) of the Code, any person who is, or becomes, interested in 1% or more of any class of relevant securities of the offeree company or of any securities exchange offeror must make a Dealing Disclosure if the person deals in any relevant securities of the offeree company or of any securities exchange offeror. A Dealing Disclosure must contain details of the dealing concerned and of the person's interests and short positions in, and rights to subscribe for, any relevant securities of each of (i) the offeree company and (ii) any securities exchange offeror(s), save to the extent that these details have previously been disclosed under Rule 8. A Dealing Disclosure by a person to whom Rule 8.3(b) applies must be made by no later than 3.30 pm (London time) on the business day following the date of the relevant dealing.

If two or more persons act together pursuant to an agreement or understanding, whether formal or informal, to acquire or control an interest in relevant securities of an offeree company or a securities exchange offeror, they will be deemed to be a single person for the purpose of Rule 8.3.

Opening Position Disclosures must also be made by the offeree company and by any offeror and Dealing Disclosures must also be made by the offeree company, by any offeror and by any persons acting in concert with any of them (see Rules 8.1, 8.2 and 8.4).

Details of the offeree and offeror companies in respect of whose relevant securities Opening Position Disclosures and Dealing Disclosures must be made can be found in the Disclosure Table on the Takeover Panel's website at www.thetakeoverpanel.org.uk, including details of the number of relevant securities in issue, when the offer period commenced and when any offeror was first identified. You should contact the Panel's Market Surveillance Unit on [phone] if you are in any doubt as to whether you are required to make an Opening Position Disclosure or a Dealing Disclosure.

Publication on a website

In accordance with Rule 26.1 of the Code, a copy of this announcement will be published on the GKN website (www.gkn.com) by no later than 12 noon on the business day following this announcement. The content of the website referred to in this announcement is not incorporated into and does not form part of this announcement.