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Why companies are plugging their pensions shortfalls with cheese and whisky
Dairy Crest has come up with a unique way to tackle its pension shortfall. The company – one of the UK's largest milk suppliers – is giving 20,000 metric tonnes of cheese to pension trustees.
Clever with Cheddar
Like many long-established British businesses, Dairy Crest's legacy pension scheme has become a financial headache. Although the maker of Cathedral City cheese closed its final salary scheme in 2010, the plan still has more than 3000 members. Thanks to increasing lifespans and falling interest rates, the scheme's liabilities have grown rapidly in recent years.
In September 2012, Dairy Crest's pension deficit was £84 million, which it is shrinking by paying £20 million a year in cash into the fund. However, the firm today agreed to make a one-off injection of £40 million in cash into the scheme, as well as giving trustees security over £60 million of maturing cheese stocks.
At any one time, Dairy Crest has around £150 million of cheese in its inventory. This is matured, usually for 12 to 42 months, in a huge, temperature-controlled warehouse in Warwickshire. After maturing, the cheese is cut, packaged, labelled and distributed to supermarkets and other retailers.
What this means is that if Dairy Crest gets into financial difficulty, its pension fund has first dibs over 20,000 one-tonne pallets of maturing cheese in its warehouse. Given the massive international market for cheese, this Cheddar is a commodity that can easily be sold on and thus turned into cash by the pension fund.
This seems to be a win-win deal for both Dairy Crest and its pensioners. If the firm does get into financial difficulties, then the pension fund won't have to rely on the safety-net offered by the government-backed Pension Protection Fund (PPF). At the same time, Dairy Crest avoids injecting yet more cash into its pension scheme, leaving it with more funds to invest for growth.
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Three more peculiar pension pledges
Twenty million cubic metres of cheese must be the most unusual asset ever pledged to a pension scheme. However, this isn't the first time that a UK-listed company has found a novel way to plug its pension deficit. Here are three other firms that took unusual approaches to pumping up their pension funds.
Diageo: Whisky galore
Just like Dairy Crest, Diageo used stocks of its own products to plug the gap in its pension scheme. In mid-2010, the drinks giant decided to back its pension fund with one of its most popular products: Scotch whisky.
Following the financial meltdown, Diageo found it had a pension deficit of £862 million in April 2009. As part of its 10-year plan to wipe out this deficit, Diageo transferred £500 million of maturing whisky to its pension trustees.
Over 15 years, this whisky would generate a yearly income of £25 million to the pension fund, after which Diageo would buy back the spirit for up to £430 million. As well as this 'spirited' solution, Diageo handed over £197 million in cash to its pension trustees.
Marks & Spencer: Bricks and mortar
When Marks & Spencer found itself with a massive shortfall in its pension fund, it turned to its stores to help fill this financial black hole. Like Dairy Crest, M&S pledged existing assets -- in this case, its huge portfolio of high-street properties -- to its pension fund, in order to support around 123,000 past and present scheme members.
A valuation in March 2009 revealed a £1.3 billion deficit in the M&S pension fund. Hence, in May 2010, the retailer set out an £800 million funding plan designed to plug this gap. As well as yearly cash contributions rising steadily from £35 million to £60 million, M&S expanded a property-backed partnership with its pension scheme. This gave the fund extra yearly income of £36 million for 15 years from 2017, plus a lump sum worth £350 million in 2031.
Uniq: Take the company
Uniq – another milk supplier with a huge pension deficit – came up with an even more radical way to plug its pension shortfall.
At one point, the market value of Uniq as a listed company was a mere £9 million, while its pension fund had a £436 million black hole by April 2009. Clearly, only the most radical solution could prevent Uniq's pension fund falling into the PPF safety-net. Hence, Uniq's directors came up with a unique solution: in 2010, they handed nine-tenths (90%) of the company's shares over to its pension trustees.
By delivering the vast majority of the business and its future profits to its pension scheme, Uniq managed to safeguard the pensions of around 21,000 members – many of whom are retired milkmen living on modest pensions.
A year later, in July 2011, Irish food group Greencore bought Uniq for £113 million, with £103 million of this sum going to pension trustees. Despite this sale, Uniq pensioners have seen their benefits cut, notably losing the index-linking that linked their future pension rises to inflation (rising prices).
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Be creative with your retirement planning
Finally, it worth mentioning that if you're worried about how much money you might have in your retirement, you can always start saving more cash for your retirement in a tax-free shelter. The obvious vehicles for this saving are either an ISA or a SIPP (a form of pension where you get lets of control over how your money is invested.
