Diageo serves up millions of barrels of Scotch whisky to plug pension deficit

The drinks giant Diageo is to use millions of barrels of its maturing whisky as collateral to help plug its £862m pension deficit. Under an agreement with its UK pension trustee, Diageo said yesterday it will transfer its maturing whisky stock – which has a book value of £500m – into a new pension funding partnership (PFP).

The transfer of the spirit – a mixture of grain and malt maturing whisky from Diageo distilleries such as Talisker, Lagavulin and Caol Ila – means the pension fund's deficit will be immediately reduced as the assets can be set against its liabilities.

Under the deal, Diageo will pay £25m a year into the pension fund in the form of fees for options to acquire the whisky stock at any point. The transfer of the stock, which will be less than three years old, will involve between 2 million and 2.5 million barrels at any one time. When combined with its current payments into the fund, Diageo will continue to pay about £50m a year, which is about the same amount as it has since 2007. This annual payment will be broadly cashflow neutral and the deal will not affect Diageo's net assets.

At the end of the PFP's 15 years, the trustees will be able to sell the whisky back to Diageo at either a price that matches the pension deficit at that time or for no more than £430m, depending on which option is lower.

Gaping pension deficits are a major burden for many UK firms, and companies such as Marks & Spencer and Sainsbury's have already used property assets in a similar way to help guarantee their pension schemes. When Diageo's triennial valuation was carried out last April, its pension fund had a deficit of £862m, which triggered a requirement to put in place yesterday's 10-year funding plan. Diageo said that its funding position had improved "significantly" since then. The scheme was closed to new members in 2005, in favour of a defined contribution plan.

In other parts of the new agreement, Diageo said that £197m had been transferred into the UK scheme, under the terms of its 2006 funding plan. Diageo has also set aside £338m to transfer into the scheme, if an equivalent reduction is not achieved over 10 years.