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Diageo uses escrow funds to plug pensions deficit

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  • Diageo uses escrow funds to plug pensions deficit

UK - Diageo, the drinks giant, is transferring money set aside in an escrow account into its closed defined benefit pension fund, in a bid to improve the scheme's deficit.

The firm announced yesterday that its pensions deficit, on an IAS19 accounting basis, had risen steeply from £408m (€464m) on 31 March 2008 to £1.383bn by 31 March 2009, so it is moving an extra £150m - which has been placed in escrow over the last three months - into the £3.537bn fund to try and reduce the deficit.

Diageo's preliminary results for financial year ending 30 June 2009 stated the firm was now in negotiations with the pension fund trustees about future funding plans, however officials believed "annual cash contributions are not expected to increase significantly".

Figures from the pension fund's 2008 annual report showed Diageo has been paying employer contributions of 36.4% of pensionable salaries since 1 January 2007, and has been setting aside £50m a year as part of an agreement made in March 2006, to try and reduce what was a £201m deficit on its UK funded and unfunded pensions liabilities taken from the last actuarial valuation.

Data is not available about the scheme's 2009 pensions liabilities and assets, as officials say the figures are currently being assessed by auditors, alongside its latest actuarial valuation.

Diageo closed the scheme to new members in September 2005, and figures show the majority of its membership are now pensioners or deferred members because of 63,288 in March 2008, just 4,361 (7%) are still active members and half of the remaining sum are receiving pension benefits.

According to the most recent scheme fund annual report, the Diageo pension scheme was 92.2% funded but had achieved a return of just 1% in 2007/07 - 60 basis points lower than its benchmark target return.

The asset allocation to 31 March 2008 was 14.2% in benchmark managed equities, 23.4% in unconstrained equities, 5.55 in private equity while 32.6% was held in bonds and 1.6% was in cash. The remaining assets were split as 12% in property and 10.7% in a hedge fund offering provided by GLG Partners.

Performance data revealed the fund saw a positive return in all asset classes, but underperformed in the bonds class, as the actual return was 0.7% against a target of 8%. In contrast, Cordea Savills and CB Richard Ellis had managed to generate a decent return compared with the benchmark as the actual return was 1.2% again a loss of 10.7% on the target return. Equities also delivered 1.2% rather than -2.7% target, and the hedge fund allocation generated 4.6% rather than 8.9%.

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