The maker of Johnnie Walker scotch, Diageo, found an innovative way to plug a deficit in its pension plan: put aside 2 million barrels of maturing whiskey from its distilleries in Scotland. Here’s the official news from Diageo:
Diageo has today announced that agreement has been reached with the Trustee of the UK Diageo Pension Scheme (the UK Scheme) on a 10 year funding plan. At the time of the triennial actuarial valuation at 1 April 2009 the deficit of the UK Scheme was £862 million. This triggered a requirement to put in place the 10 year funding plan which has been announced today.
Key points of the agreement include:
£197 million which was agreed under the 2006 funding plan has been transferred to the UK Scheme.
A pension funding partnership will be formed (the PFP), which will hold maturing whisky spirit as assets. This structure will generate an income to the UK Scheme which is expected to total £25 million each year over the term of the PFP. The PFP is expected to be in place for 15 years after which time the Trustee will be able to sell its PFP interests to the company for an amount expected to be no greater than the deficit at that time, up to a maximum of £430 million.
The company will further underwrite the reduction of the UK Scheme deficit through an agreement to make conditional cash contributions into escrow totalling £338 million if an equivalent reduction in the deficit is not achieved over the 10 year term.
It is expected that the annual payments to the UK Scheme of £25 million together with payments which are anticipated under the agreement currently being negotiated in respect of the Guinness Ireland Group Pension Scheme will be broadly cash flow neutral against the £50 million per annum which has been paid in respect of the UK Scheme since 2007. These arrangements will have no impact on the value of Diageo’s net assets.
Further details:
Diageo has released £197 million to the UK Scheme under the 2006 funding plan. This comprises £147 million released from escrow and an additional £50 million paid directly. In addition Diageo and the Trustee will establish a pension funding partnership. Diageo will contribute at least £430 million to the PFP, £367 million of which will be paid to the UK Scheme which the Trustee has decided to invest in the PFP, with the balance paid directly into the PFP by Diageo companies.
These capital contributions will be used to invest in maturing whisky spirit. The PFP will generate an annual income to the Trustee anticipated to be £25 million. The 2 PFP’s investments in the maturing whisky spirit will provide the Trustee with collateral against Diageo’s current funding obligations to the UK Scheme. The investment will be made via option arrangements, allowing Diageo to retain effective control over the maturing whisky spirit.
The PFP will be consolidated in the Diageo group accounts and is intended to remain in place for 15 years, after which time the Trustee may sell its investment in the PFP back to Diageo for an amount expected to be no greater than the remaining deficit in the UK Scheme, up to a maximum of £430 million. Diageo will continue to make annual contributions in respect of its employees’ future pensions benefits under the UK Scheme, of approximately £50 million annually.
The triennial valuation was carried out during an unusually volatile period for global capital markets and the significant deficit at that time was partly as a result of historical lows in asset values and interest rates. The funding plan includes an allowance for the UK Scheme’s deficit to close at a faster rate than expected under the Trustee’s valuation assumptions. This allowance is backed by conditional cash contributions, up to a maximum of £338 million, which will be paid into escrow and which will transfer to the UK Scheme at agreed dates if the deficit is not reduced as anticipated over the 10 year term.
Following separate negotiations with the Irish Scheme Trustee, Diageo has provisionally agreed a deficit funding arrangement in respect of the Guinness Ireland Group Pension Scheme (the Irish Scheme). This agreement is subject to regulatory approval. This deficit funding arrangement is anticipated to result in additional initial contributions to the Irish Scheme of approximately €21 million (£17 million) annually over a period of 18 years, provision for further deficit closure supported by conditional cash contributions if the anticipated deficit closure is not achieved, and the Irish Scheme having access to a contingent asset.