Britain's Dairy Crest Group took an unusual step to protect its pension fund and further reduce its deficit, signing over its maturing cheese inventory to the retirement scheme.
Taking moves among many U.K. companies to tackle their pension deficits to another level, Dairy Crest said on Thursday it had granted a floating charge over 60 million pounds ($92 million) worth of its cheddar cheese stock, valued at 150 million pounds at the end of March.
The milk processor, whose brands include Country Life, Clover and flavored milk drink Friji, will also make a one-off 40 million pounds cash contribution to plug its pension fund deficit.
Pension funds are struggling to cope with extra costs from people living longer in retirement and are also finding it tough to generate adequate returns in volatile markets since the financial crisis of 2008.
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The producer of Cathedral City cheese said the move meant that if the company became insolvent, the pension fund could sell the cheese stock in order to pay its pensioners an income.
"If a company has valuable assets that are not pledged to a bank, why not pledge them to their pension scheme if that means they don't have to put their hands in their pockets to put large amounts of cash into their retirement scheme," said Charles Cowling, managing director at JLT Pension Capital Strategies.
Dairy Crest's 3,000-member pension scheme had a deficit of 84 million pounds in September 2012. The final salary scheme was closed to new members in 2006 and future accruals from existing members were ended in 2010.
Not a Cheesy Deal
Dairy Crest will use some of the proceeds from the sale of its French branded spreads business, St Hubert, towards the cash payment to the pension fund. The sale fetched 430 million euros last year when Montagu Private Equity SAS acquired the firm .
The company has been working to reduce its pension deficit over the last five years.
It closed its final salary linked pension scheme to new members in 2010 and completed a 300 million pound bulk annuity deal in 2009, in which it exchanged U.K. gilts for an insurance policy to cover a portion of the pension liabilities.
It also makes annual contributions of 20 million pounds to its pension scheme to reduce the shortfall.
Other British companies are also dipping into their own coffers to tackle spiraling pension fund gaps.
BT injected an extra 2 billion pounds into its pension scheme in 2011 to address a 1.9 billion pound deficit and closed its final salary pension scheme in April 2001.
Dairy Crest last year reported a pretax profit of 51.4 million pounds on the sale of St Hubert, and said it would reorganize its capital structure as a result.
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The firm made an early repayment of 100 million pounds of loan notes at an cost of 8.8 million pounds, and reduced its revolving credit facility by 51 million pounds to 247 million pounds, as it is no longer required.
Dairy Crest has been trying to cut losses in its core milk operations and said it would consolidate its business into a single structure from the next financial year.