Cash-strapped U.K. corporations are rummaging through their attics in search of suitable assets to contribute to their defined benefit pension plans.
And — as highlighted by beverage maker Diageo's contribution of 2.5 million barrels of maturing whisky to its £3.2 billion ($4.7 billion) pension fund earlier this month — these attic “finds” are becoming increasingly unusual.
Known as contingent funding, the strategy is typically used by companies in lieu of cash to plug pension fund deficits during triennial valuations. That's when a new actuarial valuation of the fund is issued, and company officials and pension trustees agree to new contribution arrangements.
John O'Brien, senior consultant in Mercer LLC's European financial strategy group in London, said corporate executives are considering a wider range of holdings to contribute and are finding new ways to structure the funding arrangements to avoid overfunding the plans in the future.
“It is likely that we'll see a lot more creativity there,” Mr. O'Brien said.
U.S. companies haven't used contingent assets primarily because they don't have the same tax benefits as direct contributions, said Michael Archer, director and head of intellectual capital for the North American retirement business at Towers Watson & Co. in New York.
“If there is no tax advantage, it's hard to see why a company would do something like this,” Mr. Archer said in an e-mail answer to questions.
In the U.K., companies get tax breaks on some forms of contingent funding — specifically those using special-purpose vehicles, like the Diageo example — similar to the breaks they get on direct pension contributions. In the U.S., special-purpose vehicles are not tax-exempt.
Also, unlike their British counterparts, U.S. companies don't have to negotiate contributions with plan trustees, and it is easier for U.S. companies to reclaim assets from overfunded pensions, he said.
However, Mr. Archer added that some U.S. funds more recently have used a form of contingent funding — letters of credit — to avoid Pension Protection Act restrictions that limit the amount of lump-sum payments when a fund is less than 80% funded and bars them when less than 60% funded.