Thanks very much to Nick S for this news – Diageo plc is going to be dealing with its pension fund deficit by making a contribution of up to 2.5m barrels of whisky. Back in the dawn of CT, we addressed some of the financial aspects of this sort of thing …
Actually it’s a little less exciting than it looks on first appearances. While I would personally consider barrels of unmatured whisky to be a reasonable investment in a pension fund (they’re long-dated assets and more or less realisable), I did rather wonder on seeing the headline how they’d got that one past the trustees and it appears that they didn’t. If you look closely at the features of the deal mentioned in the Guardian story, it looks a lot more like a secured loan than any deal under which the pension fund would be taking the price risk and reward on the booze.
One thing worth noting is that the optionality and liquidity of the investment is discussed explicitly as a key part of the value of whisky in the barrel – at any given time, you can decide not only when to bottle the stuff (NB: part of the cost of bottling a 10 year old whisky is that you lose the ability to bottle 15 year old whisky five years in the future – ignoring this option value will reliably drive you out of the distillery business), but you can choose whether to do so as a single malt or part of a blend. Brown spirits are a great example to use in your economics or business class, because time and long-term planning are absolutely intrinsic to the industry – you can use lean production and just-in-time methods to build anything from Toyotas to iPods, but the only way to get a barrel of 10 year old whisky is to start with a barrel of 9 year old whisky and wait.
 I see the charts on that post did not survive one of our server moves, and I’ve long since lost the dataset (which, slightly worryingly, people setting up investment schemes marketed to the public ask me for roughly once a year). But the loss to science is not all that great – basically the curve in question was a flat line at around 5% nominal – also if you dig right down into the comments thread, you’ll see that Nick made a few points about barrel versus bottle aging and angels’ share which make me suspect that the actual calculations were a bit spurious.
 Differing characteristics of whisky versus wine, considered purely in financial terms: Whisky matures in barrels rather than bottles, so some of it evaporates every year which has to be factored into the yield. More importantly though, whisky is an industrial product rather than an agricultural one; the quality and other characteristics are standardised, and you know pretty much exactly how it’s going to taste at different ages. This is why it makes sense to think in terms of a forward curve in planning for a distillery, but probably a lot less so for a vineyard. Whisky’s a bond, wine is an equity.
 The basic idea is that if the Diageo pension fund still has a deficit in 15 years’ time, Diageo will buy back the whisky for £430m, and Diageo will pay a fee to the fund of £25m/year in the meantime. If the deficit has been closed by 2025 by markets going up or otherwise, Diageo buys back the Scotch for a nominal sum. Also, it’s not 25m specific barrels that have been transferred to the pension fund – Diageo can take out and replace barrels if they want or need to bottle them. The Scotch here is basically collateral for a long-dated put option – if only AIG had owned a wine cellar.