Dairy Crest is set for a multi-million pound cash windfall by slashing pension payouts

Oliver Gill
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Dairy Crest was spun out of the government's Milk Marketing Board in 1981

The British dairy firm behind Cathedral City cheddar and Clover today revealed it has secured millions of pounds of savings by taking a knife to pension payouts.

Dairy Crest, which was born in the early 1980s out of government's Milk Marketing Board, said linking retirement payouts to a lower inflation rate would save £12m in cash over the next two years.

The firm has agreed to apply an annual increase to pensions referencing the consumer price index (CPI) rather than the retail price index (RPI).

Because of the complex way pensions are accounted for, this means Dairy Crest's financial bottom line will be boosted by £125m in the year to March 2018.

The firm said it had reduced its pension shortfall almost a third between 2013 and 2016, and planned to wipe out the deficit by 2022.

Read more: Tata Steel strikes deal to separate £15bn British Steel Pension Scheme

Hot topic

The inflation rate pensions are linked to has been a hot topic for a number of years. With the CPI currently lower than the RPI, the change has the effect of reducing the annual increase made to pensioners.

In 2010, public sector final salary schemes changed by the government to be linked to the CPI rather than RPI.

While a number of private companies – such as British Airways in 2011 – have subsequently made similar amendments, making the change can be a challenge. This is because the reference to RPI is specifically referenced into pension scheme governing agreements rather than a more general reference to the prevailing rate of inflation.

One recent example of a so-called "hard-wire" problem was the British Steel pension scheme, which was ultimately restructured using a different arrangement last month.

Read more: Cream price rises churn Dairy Crest margins but cheese stops nightmares

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