Drinks giant Diageo implemented an innovative strategy in 2010 to fill an £862 million shortfall in its pension fund by transferring millions of barrels of maturing whisky. This 15-year agreement, later extended to 2030, involved whisky stocks from various Scottish distilleries, including single malts from Talisker and Lagavulin, being transferred to the Diageo pension fund.
As whisky matures, its value increases. This process provided the pension scheme with a guaranteed income stream from the sale of some barrels and a valuable tangible asset in the remaining stock. Concurrently, Diageo reduced its own cash contributions needed to address the deficit in the retirement scheme.
The strategy appears to have been successful. The pension scheme is now in surplus, partly due to higher interest rates reducing the present cost of future pension payments. Diageo has not made contributions to the fund in the past two years.
This development comes as Diageo's chief executive, Dave Lewis, works to revitalize the world's largest spirits group, following nearly 2,000 job cuts last year. The latest financial accounts indicate that the remaining whisky stock is valued at approximately £550 million.
Diageo has the option to exit the agreement in four years if the pension fund remains in surplus. However, if there is a deficit, the company could be required to pay up to £430 million in cash to repurchase the remaining barrels from the scheme, with the exact amount dependent on the size of the shortfall. Diageo has stated that the original deal did not create an off-balance-sheet asset, and the resolution of the pension issue will not impact the company's accounts. Shareholders are unlikely to see any windfall from the surplus, as the focus has been on solving the pension fund's deficit.