Diageo Uses Scotch to Plug Gap in Pension Plan

Diageo, the maker of Johnnie Walker whiskey, found an innovative way to plug a gaping deficit in its pension plan: put aside 2 million barrels of maturing whiskey from its distilleries in Scotland.

Diageo said Thursday it would transfer ownership of £430 million, or $645 million, worth of whiskey to a pension funding partnership. Diageo employees would not receive their pensions in whiskey rather than cash, but the move does give them a guarantee that they would not walk away empty-handed should the company default.

Glass of Whiskey
Jonnie Miles | Getty Images
Glass of Whiskey

“A pension funding partnership will be formed, which will hold maturing whiskey spirit as assets,” Diageo, which also makes Guinness stout and Smirnoff vodka, said in a statement.

As part of the deal, Diageo agreed to pay the pension partnership £25 million a year as it sells the recently distilled whiskey once it matures after three years and replaces it with new stock. The agreement would expire after 15 years, at which point Diageo would buy back the whiskey, which comes from distilleries such Oban on the west coast of Scotland.

Companies are searching for new ways to reduce their pension deficits, which increase as people live longer. The British supermarket chain J Sainsbury said earlier this year it would transfer property into a pension vehicle, while Whitbread agreed to hand over a share in its portfolio of restaurants and hotels. The investment firm Man Group moved some hedge fund assets into a trust as a security for its British pension plan in March.

“We’re seeing a huge growth in the use of non-cash funding,” Marc Hommel, leader of the pensions practice at PricewaterhouseCoopers in London, said. “There are big pension deficits and sponsors are cash-strapped. These mechanisms provide security for the pension plans in exchange for less cash.”

Diageo’s pension deficit was £862 million at the beginning of April. The company also said it transferred £197 million to the pension plan. Diageo expects the new pension arrangements to be “broadly cash flow neutral” and not to have any impact on the value of its net assets, it said.