Drinks giant Diageo has plugged a hole in its pension fund by using millions of barrels of maturing whisky, in a deal first struck in 2010 that has helped turn an £862 million shortfall into a surplus.
Under the arrangement, whisky stocks from distilleries across Scotland, including single malts from Talisker on the Isle of Skye and Islay-based Lagavulin, were transferred into the Diageo pension fund. The deal was originally set to run for 15 years but has since been extended to 2030.
How the whisky scheme works
As whisky matures, its value rises, giving the pension scheme a guaranteed source of income from selling off barrels over time, as well as a valuable, tangible asset in the stock that remains. The arrangement also allowed Diageo, the owner of Guinness and Johnnie Walker whisky, to cut the amount of cash it needed to pay into the scheme to repair the deficit.
The approach appears to have paid off. The pension scheme is now in surplus, helped partly by higher interest rates, which have reduced the current cost of future pension payment promises. Diageo has not needed to make contributions to the fund for the past two years.
A boost for new chief executive
The turnaround gives one less headache to Dave Lewis, the former Tesco boss who took over as Diageo's chief executive and is trying to revive the fortunes of the world's largest spirits group after nearly 2,000 jobs were cut last year. The company's latest accounts show the remaining whisky stock held by the pension fund is worth almost £550 million.
What happens if the deal ends
Diageo can exit the deal in four years' time if the pension fund is not in deficit. If it is in the red at that point, the company would have to pay up to £430 million in cash to buy back the remaining barrels from the scheme, with the exact amount depending on the size of the shortfall.
Diageo has said there will be no impact on its accounts either way, since no off-balance-sheet asset was created under the original deal. That means shareholders hoping for some kind of windfall payment if the scheme ends up in credit will be disappointed.
Even so, the company's long-running pension problem looks to have been resolved, thanks in large part to the maturing casks of Scotch sitting in its fund.
