Alcoholic drinks producer Diageo has changed a whisky-backed funding deal that made the headlines in 2010, with early ABFs coming under review as the arrangements approach their end date – and companies look to avoid overfunding or having to make huge ‘bullet’ payments.

 

Diageo, the Scottish multi-national which owns a suite of alcoholic drinks brands from Talisker to Guinness, managed to get a wider public interested in pension funding when, back in 2010, it agreed to back a portion of its defined benefit obligations with barrels of maturing whisky. The deal was due to end in 2024 and included an option for the trustees to sell their interest in the arrangement back to the company, taking coupon payments in the meantime.  

 

However, in February last year the company and trustee decided to extend the ABF until 2030, while the coupon payments, which total £125m between 2020 and 2030, reduced to £11.4m a year from £25m a year as a result. At the same time, the parties negotiated that these payments should only be made if the scheme is in deficit at the start of the scheme year, rather than being payable regardless of the funding position. 

 

Retailer M&S has also made changes; in June this year, the trustees “approved a short-term re-profiling of the B interest coupons payable from the [Scottish Limited Partnership] to the Trustee”, after considering if and how the security provided by the SLP might be improved over the longer term. 

 

Rival supermarket chain Sainsburys, another early adopter, had an ABF in place since 2010 providing for annual coupon payments and a payment of £600m in 2030 depending on the scheme’s deficit. In 2019, the parties agreed to replace the ABF with a new one which is to end in 2038 and excludes the final bullet payment. 

 

 

This kind of restructuring of asset-backed arrangements has been a theme over the past two years, said Ian Cochrane, director at consultancy firm Isio.  

 

This is because companies with older arrangements that include bullet payments are getting closer to having to make this payment, “and frankly no one expected for this to happen”, he said.  

 

Cochrane argued that in 2010 to 2012, the general belief was that low interest rates were “a short-term blip and pension deficits would disappear as yields rose”, with companies hoping that if they “kick the can down the road 20 years” the problem would resolve itself. However, 10 years later, the prospect of paying out hundreds of millions as schemes remain in deficit is “much more real”. 

 

A second driver for companies looking to unwind their arrangements is the government’s corporation tax rise from currently 19% to 25% in April 2023. Unwinding ABFs leads to a tax clawback as payments into the arrangements are tax-relieved. Cochrane said some companies are therefore bringing the ABF unwinding forward to avoid paying the clawback at the higher rate.  

 

“Tax has been a bit of a trigger,” said Cochrane. But there are yet other factors that also come into play, some related to the asset itself, others to the scheme – for example where the company disposes of the asset backing the funding deal, or where the pension fund is looking to move to buyout. 

 

These reasons are “all coming together”, said Cochrane, with many more companies and schemes reassessing them. 

 

The pandemic has however not played a role in the restructuring of ABFs, he argued. “If anything, Covid has got people thinking about putting these in, because it is a good way to manage pension funding costs,” he said. 

 

He said the restructurings are not down to affordability constraints, as asset-backed funding arrangements generally work well for corporations, but more for operational efficiency. ABFs remain attractive for funds; BT agreed an ABF with its multi-billion pound scheme this year to help address an £8bn deficit. The Pensions Regulator has also voiced support for such arrangements, dispelling trustee concerns over regulatory scrutiny.