Europe next project for Diageo
From April 1 this year UK food and beverages corporation Diageo brought together under a new benefit structure the former Grand Metropolitan (£1.4bn) and Guinness United Distilleries (£1.6bn) pension scheme assets that make up the group’s combined £3bn (e4.5bn) UK retirement fund.
With membership of around 9000, active members, 30,000 pensioners and 35,000 deferred pensioners, the new joint plan had to accommodate two very mature schemes within its structure and philosophy - albeit with very different historical investment strategies behind them.
Steve Mingle, group pensions and benefits manager at Diageo, explains: “At the same time as the formal merger of the two groups, we put in place a new benefits structure which we felt was a compromise of the two existing arrangements - trying to take the best features of each plan.” Its essential feature, he comments, is an unequivocal defined benefit (DB) structure, which he says is very particular to the Diageo company philosophy.
The company has no defined contribution (DC) or top up element to pension arrangements, but Mingle notes that Diageo’s desire when reshaping the plan was to bring flexibility to the fore.
He says: “We decided to offer em-ployees a choice of benefit and accrual rates, so we now have two streams, one where members can pay 4% and get an accrual rate of 1.6%, or another where they pay 6% to get a 2% accrual. They can also switch at any time be-tween the two, which I think is an es-sential feature, because we knew em-ployees were looking for this type of flexibility.
“Lack of adaptability is a criticism many people have of DB schemes, and at Diageo we didn’t just want to have one benefit formula - partly because we recognise that although many workers would like to prepare more fully for retirement they can’t always afford to, or the structures aren’t sufficiently geared towards enabling them to save and switch their savings emphasis over time.”
The company has recorded an even 50-50 split take-up by employees on the different options so far, and Mingle says the accrual rate switching feature for employees has been particularly well received by the company’s employees.
He also points out that Diageo carried out around 250 roadshows for employees around the UK to explain what was happening with their pensions arrangements, and says most employees expressed a view that the new deal was a better overall package than either of the previous two plans.
Such education and consultation with employees, Mingle adds, is a crucial tenet of the retirement harmonisation Diageo wishes to implement world-wide.
“It stands to reason that you can’t have people working together in the same offices with different benefit arrangements, because it creates tension,” he says.
However, Mingle acknowledges the cost issue implicit in such a project. “Obviously we wanted to be prudent with the amount of money spent on such a restructure, so we were very clear that the new package would apply for all future benefits, and benefits earned for previous service would not be changed.
“This recognises that in the past, these were completely different companies. What we have done is to use a conversion system to bring previous pension rights into the new benefits formula.
“There will be no loss for employees. But no windfall either.”
Globally, the group is still looking closely at its multitude of benefits systems and particularly at the key issue of migratory workers.
“We are still formulating policy here for our internationally mobile em-ployees, but essentially the starting philosophy is to ensure our members are not disadvantaged in any way.
“We will do whatever it takes to achieve this, and one option we are exploring, which I expect to attain some credence is to have some kind of cut off point in the plan should an employee be abroad for a lengthy period of time.
“What we are proposing to do is revalue the level of, say, their UK plan benefits, and bring it in line with a notional earnings index - so they are not penalised. This could then be extended to plans in any country if the structure is right.”
Diageo abroad comprises UDV, the international wines and spirits business, Guinness, Pillsbury - the US convenience food group incorporating Haagen Dazs, and Burger King with the US schemes having a similar value of around £3bn in assets.
“These are separate plans though and the businesses value their autonomy,” Mingle stresses.
“In Europe we have a plan in roughly every country; mostly very small and for executives.
“However, the pressure is building all the time with the various reductions taking place in European state social security systems, to implement a second tier company arrangement for all employees.”
Diageo has already begun harmonising benefits in some European countries, and Mingle says this is the next big project on the agenda, with the UK restructure now complete over a year’s work. “One of the problems though is that a lot of the European schemes are insured plans, and we are trying to find ways of adapting these to fit into company strategy,” he says.
In terms of a Pan European pensions initiative, Mingle believes the current obstacles are just too great to talk seriously about it today.
“From a company perspective our approach has always been to be competitive locally, and to achieve harmonisation while there are so many different state benefit provisions around is extremely difficult, because ‘competitive’ varies so much across member states.” Nevertheless, the company is looking closely at how to use pooled funds for its cross-border pension arrangements.
The Diageo UK fund has an ex-tremely high equity weighting - well into the 80% range, although there is a significant property portfolio on the Guinness side of the plan. And Mingle says the approach encapsulates the way the company thinks in terms of financing pensions and benefits.
“One of the reasons we are such devotees of DB is by having a well funded scheme as we do in the UK, it enables us to invest very aggressively with the prospect of gaining the best long term returns, which of course translates into the cheapest long term costs.
“Put simply, we deliver the benefits in the most cost-effective manner to the company, and therefore the shareholders. These things can be self perpetuating. Once you get to a surplus level and can continue to invest ag-gressively, which admittedly can often be difficult in a mature scheme, then you could be on a holiday.
“The first valuation of the new Diageo scheme will probably show that the company is set for a contributions holiday over a significant number of years.”
Mingle explains that both previous schemes were very aggressive in-vestors, with “barely a bond in the house”, and as an interim measure the scheme is retaining the 15 managers previously holding the assets.
On the former Grand Met side half of the portfolio is in a balanced portfolio managed by Mercury Asset Management (MAM), a third is a Barclays Global Investors (BGI) managed index tracker, leaving a sixth of the fund in specialist funds with Mercury, BGI and Clay Finlay.
On the former Guinness side, the investment mandates are all specialist held by Mercury, P&D, Schroder, Framlington, Morgan Grenfell, Invesco, Amerindo, Babson, Montgomery, Marathon, Shizumi (Far East) and Savills (property).
“Our investment committee and advisors are looking at this issue to decide whether one style of management will win out, or whether we need some kind of compromise.
“One thing I think I can say is that if we have 15 investment managers in a year’s time I would be rather surprised, but I can’t predict which styles or managers will remain,” he comments.
Diageo is currently carrying out asset liability research in conjunction with Bacon & Woodrow to suggest whether the fund’s investment approach needs modifying.
“We are also contemplating our in-vestment style, and I suspect the outcome will be that the investment re-mains predominately ‘real’, but with difficult decisions to then be taken in terms of specialist/balanced/index strategies,” he says.