Diageo to plug £653m pension fund deficit over next seven years

Diageo, the drinks giant, joined other UK companies yesterday in announcing plans to plug the hole in its pension fund, pledging to pay off the £653m deficit over seven years.

The company, which makes Smirnoff vodka and Johnnie Walker whisky, will make an initial payment of £100m later this year, following a fresh, three-yearly assessment of its pension deficit at the end of the month. It will then pay off the total shortfall of £653m over seven years, from the start of the company's next financial year in July. Diageo said the plans would not affect its share buy-back programme.

The move comes after Diageo sold the last tranche of its holding in General Mills for $1.154bn (£660m) in November and follows its full exit from Burger King. Paul Walsh, the chief executive, said the move would provide "further clarity" in relation to the company's balance sheet.

Diageo closed its final-salary pension scheme to new entrants last September. The scheme has 5,400 active members, 31,600 pensioners and 30,700 deferred members (staff who have moved on to other companies but remain members of the pension scheme). The group said it would continue to make a cash contribution to annual benefits awarded to active members, which in the current financial year is expected to amount to £50m.

New employees can join a defined-benefit plan, which involves the company paying 25 per cent of pay each year into a retirement fund while staff contribute 6 per cent of monthly salary. Under the new pension plan, employees can choose to retire at 55. For members of the old final-salary scheme, the retirement age is 65 for men and 60 for women.

Last week, British Airways, which has one of the biggest pension fund deficits in the UK, announced plans to plug the £1.4bn hole in its pension scheme by raising retirement ages and capping benefits at the rate of inflation. BA offered to inject £500m into its main pension fund to help clear an actuarial deficit which stood at £928m in March 2003, but only in return for significant concessions from staff.

The plans met with fierce resistance from the unions, which immediately threatened to ballot their members on industrial action. The Transport and General Workers Union said the proposal was "both unfair and unacceptable and does not represent a starting point for negotiations".