Whack fal de darrio, there’s whisky in the pension fund

by Daniel on July 2, 2010

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[1], 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[2] (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[3] 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.

[1] 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[2] and angels’ share which make me suspect that the actual calculations were a bit spurious.

[2] 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.

[3] 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.



Richard J 07.02.10 at 8:40 am

Four relevant things:-

a) If Diageo structures this right, from first principles, they’re likely to get a tax deduction for the full carrying value of the whisky contributed to the scheme, without spending much in the way of cash.

b) Owing to the vagaries of pension deficit accounting, their balance sheet won’t be affected too much, as the asset value moves from the stock line to the pension deficit line. (Deferred tax notwithstanding).

c) How distillers carry their stock in their accounts is weird (handy summary can be found in the case of William Grant and Sons Distillers Limited v. HM Inspector of Taxes http://www.publications.parliament.uk/pa/ld200607/ldjudgmt/jd070328/grant-1.htm ) – moving it into the pension fund effectively allows them to mark to market the value of this stock.

d) Diageo plc has a tax team of 50 people, one of the largest I know of.


Anderson 07.02.10 at 9:01 am

(which, slightly worryingly, people setting up investment schemes marketed to the public ask me for roughly once a year)

My favorite parenthetical of 2010 thus far.


nick s 07.02.10 at 9:41 am

Yes, I saw a few comments about the tax deduction implied in the deal.

Looking beyond it to the kind of whisky galore available to yer public: some of the new and/or independent distilleries are offering en primeur-style cask purchases these days: for Bruichladdich, it’s between one and two grand up front, ten years’ storage guaranteed, additional increments of five years available afterwards, VAT and duty paid on bottling. Not sure how it stacks up as an investment, though.

Bruichladdich is also selling the stuff bottled in about fifty different guises these days, having bought the whole shebang from Jim Beam back in 2000; they’re even flogging undated single malts, wee bairns that can’t be called whisky and unaged white dog at a higher price than the 12-y-o standard bottling made from the casks they inherited. (Ardbeg did something similar, though less outrageously, releasing 6/7/8-y-os from their first year after reopening before it became the standard 10-y-o.) The novelty will wear out on that, perhaps — one sceptic describes it as “the neverending need to dispose of as much of the remaining inherited less than stellar stock” — but if you’re looking to buy a mothballed distillery, there’s potentially a U-shaped curve to get you over the startup costs.


sg 07.02.10 at 10:38 am

and what is your preferred method for calculating the “liquidity” of a whiskey barrel, dsquared? I’m thinking, with coke…


Bunbury 07.02.10 at 10:47 am

Italy has warehouses for Parmesan used as bank collateral but of course cheese is more liquid than whisky.


Matt 07.02.10 at 10:54 am

I have to admit being a bit disappointed by the story. From the first headline I saw I was hoping it was some sort of actual barter deal, with the pension being paid in whiskey, like something that happened in a Russian factory in the ’90’s. (The people in the coffin factory being paid in coffins and then setting up road-side coffin stands is may favorite example.)


rea 07.02.10 at 11:20 am

cheese is more liquid than whisky

No–snark fails me . . .


NomadUK 07.02.10 at 12:00 pm

and what is your preferred method for calculating the “liquidity” of a whiskey barrel, dsquared? I’m thinking, with coke…

Oh, retch!

Neat. Or not at all.


Richard J 07.02.10 at 12:04 pm

A bit of water is permissible.


dsquared 07.02.10 at 12:18 pm

According to the Scotch Whisky Association:

“How should Scotch Whisky be drunk?

This depends entirely on your individual taste and on the occasion. Scotch Whisky is a versatile drink. Served on its own, or with a little water, it can also be a refreshing drink with ice and a mixer. Scotch Whisky presents a whole range of flavours which can be extended by the addition of soda or mineral water, lemonade, ginger ale or other mixers. Scotch Whisky is also an excellent cocktail drink. Please take a look at our selection of Scotch Whisky cocktails.”


Keith Lee 07.02.10 at 12:18 pm

With Coke would be a travesty.

I second NomadUK and Richard J above. Neat, with a splash of spring water.

Excellent post.


Bunbury 07.02.10 at 12:26 pm

The Scotch Whisky Association cuts off access to no markets. There have been whisky with food initiatives and even talk of replicating the University of Bordeaux’s favourable report on the health benefits of red wine. Of course Scottish universities positing the health benefits of alcohol might not be convincing.


ajay 07.02.10 at 1:07 pm

10: hardly an unbiased source. They’re not exactly going to doom their entire US market by saying “don’t drink it with ice you heathen, it ruins the taste”.


Richard J 07.02.10 at 1:12 pm

cf Iain Banks’ Complicity.


dsquared 07.02.10 at 1:18 pm

No True Scotsman … would organise a “Spirit of Speyside” malt whisky cocktail competition.

I can’t believe I didn’t think of this when I was editing adequacy.org.


Richard J 07.02.10 at 1:28 pm

The winner of this year is Dan Thomson of Zafferano in London with his cocktail ‘Gallus Glen’, closely followed by Nicolas Michel of The Hoxton Pony with ‘Speyside’s Symphony’.

Very Scottish names…


Richard J 07.02.10 at 1:29 pm

I can’t believe I didn’t think of this when I was editing adequacy.org.

Incidentally, is this the formal admission we’ve been waiting for?


dsquared 07.02.10 at 1:56 pm

No, that was years ago.


James Wimberley 07.02.10 at 2:10 pm

“..there’s whisky in the TAR” would fit the tune better. Construct the narrative please.


Rich Puchalsky 07.02.10 at 2:59 pm

“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.”

Really? Every other major part of society is corrupt, and waiting is the only way to age whiskey? Surely there must be some kind of chemical additive that can fake the aging process. Especially when it’s blended. All the people who say that they could taste the difference are either on the take or are like the people in the U.S. who insist that they would have seen evidence that we commit war crimes.


sg 07.02.10 at 4:58 pm

well I was thinking, in the spirit of your budweiser post, that you might want to tread a similar curmudgeonly line on whiskey. But I suppose some opinions are just too dangerous…

also, I back Richard J on the relevance of complicity (which has a great movie version, btw) on this topic…


MoXmas 07.02.10 at 5:05 pm

Every time I have talked to regular drinkers of Scotch Whisky older than 20 years, they recommend drinking it over one or two ice cubes. The idea is that is releases the flavor better on the tongue, and the aroma better in the nose.

That said, as long as it’s whiskey, or whiskey, or scotch, blended or single malt, it’s usually going to be some measure of OK. Except for shots of Crown Royal. That’s no good for anyone.


Chris Williams 07.02.10 at 8:51 pm

Someone’s filmed _Complicity_ and I missed it? That’s a far far better thing to think about than whisky cocktails, which is a sick sick sick concept.


sg 07.03.10 at 3:21 am

It’s good Chris, I discovered it in my local video store in rural Japan 2 years ago, it’s quite old and has quite a good take on the book, I thought. From memory, it ditched a lot of the more interesting family stuff but kept the central detail, and was grisly in places, particularly that place.

You could probably … obtain … it with an appropriate internet search…


sg 07.03.10 at 3:21 am

On that topic, I really wish someone would set to work on movies of some of the Culture stories.


alex 07.03.10 at 5:50 pm

Fuck no! They’d ruin them.


arthur 07.04.10 at 4:37 am

On that topic, I really wish someone would set to work on movies of some of the Culture stories.

They are working on it. But they picked a Culture short story which wasn’t very Culture-ish in feel, which is worrying.



sg 07.04.10 at 11:15 am

Sadly, they’ll probably never be closer to the feeling of Consider Phlebas than the computer game Halo.


Antonio Conselheiro 07.05.10 at 12:17 am

The financial system of the Western U.S. , when “Western U.S.” meant Kentucky, was whiskey-based during the period before improved transport made it possible to sell hogs and corn for cash. Probably this is so obvious to everyone here that no one felt the need to mention it.

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