Diageo launches pension funding plan

Diageo launches pension funding plan

Diageo is to use its stocks of maturing Scotch whisky to help plug a hole in the drinks company's UK pension scheme.

The value of new-make whisky spirit will be used to back a 15-year pension funding partnership between Diageo and its pension trustees, the Johnnie Walker producer said today (1 July).

Diageo's UK pension deficit reached GBP862m (US$1.3bn) at the start of April, which triggered a requirement for the drinks firm to draw up a long-term plan to fill the gap.

New-make spirit, which cannot be termed Scotch whisky because it is aged less than three years and a day, is expected to generate GBP25m per year for the pension fund.

This, together with future expected payments, should enable the drinks giant to continue investing GBP50m per year in its UK pension fund. The group has invested GBP50m annually in the fund since 2007.

Diageo expects its deficit to be no larger than GBP430m after the 15-year partnership ends.

The drinks giant said that it would use up to GBP388m cash to help cut its pension deficit if its long-term plan does not plug enough of the gap. Diageo generated GBP1.2bn free cash flow in its 2009 fiscal year.

The group said that its ratio of pension fund deficit as a proportion of market capitalisation was less than half of the 8.4% average of FTSE 350 companies.

Diageo has two pension schemes in the UK. The Diageo Pension Scheme is a final salary, defined benefits arrangement that was closed to new members in 2005. Since 2006, new employees are able to join the Diageo Lifestyle Plan, a cash balance plan based on career earnings, in which each year members accrue a notional capital value. On retirement the total accrued value is used to purchase an annuity.