On Friday, one of my old stock-holdings was making the news. And this was for all the wrong reasons.
As I caught up with events over the last ten years or so (when I sold out), I see that all my worst fears have come true for this once-mighty stock. And there’s a valuable lesson here. In fact, it highlights one of the most dangerous aspects facing some of our top companies today.
Today, I’ll show you how a once great company was brought down by a promise gone bad. And I’ll show you what to look out for so you can avoid the same fate with your holdings.
From milkman to sandwich maker
The company I’m talking about in the news is Uniq – or Unigate as it was known back in the good old days.
You may remember Unigate and its iconic red and white milk-floats. The business was formed in 1959 by the merger of United Dairies and Cow & Gate. By the year 2000 (when I parted company with them), the writing was on the wall for the milk deliveries side of things. Unigate sold the milk and cheese business and re-branded itself Uniq – a chilled foods and freight logistics business.
But – and this is a massive but – Uniq kept hold of the pension scheme for its former workforce – the ‘milkies’.
Now, the year 2000 was an inauspicious time for anyone involved in the markets. Dotcom collapse was about to take the markets into a lost decade. But most pension funds rode out the storm. What was Uniq’s problem? Answer: A massive pension fund backed by a severely trimmed down business.
Since then, the value of Uniq has all but disappeared. Its own pension fund has taken over 90% of the Uniq business in lieu of money owed to it. And last week, the pension fund was soliciting offers for a private sale.
Bids for the remaining business – now a sandwich maker to the likes of M&S – have been coming in at around £100m. But the pension fund has a deficit of over £400m! Shareholders have been skinned alive by its pension commitments.
What a disaster. And that goes for the pensioners, half of whom have yet to retire, as well as shareholders.
It’s very unwise for a business to make a pension promise (as Uniq did) to some 20,500 former employees from such a small underlying business. Sainsbury’s has a similarly huge pension fund deficit. But its business is massive. And it’s got property assets that can be sold to clear the deficit within days.
So the thing to look out for isn’t necessarily a pension fund deficit. What’s more dangerous is a large scheme funded by a small underlying business.
And I think that’s what you’ve got with the likes of BT.
You see, BT is almost a victim of its own success. Back in the old days, you’d see teams of yellow vans and their engineers whizzing all over the landscape. They were as ubiquitous as your good old Unigate milk float.
But today, staff numbers are a fraction of the what they used to be. Many jobs were lost through ‘natural wastage’, ie retirement, and then not refilled.
But, of course, natural wastage doesn’t mean that former staff simply disappear. Oh no. All of those retired engineers still expect BT to provide them with a pension – in fact, BT has the biggest defined benefit pension scheme of any UK public company. In 2010, the business had a pension fund deficit of around £5bn.
There are some striking similarities between BT and my old friend Unigate. BT is sometimes described as a pension fund with a telephone operator attached. And there’s more than a grain of truth in that!
What to watch out for with pensions
I’ve previously talked about my worries over defined benefit pension schemes here at The Right Side. These are major commitments and they’re commitments that businesses must honour.
So as an investor, I stick to businesses that I’m sure can afford to keep up with their promises. The other way around the problem is to find investments with a somewhat more youthful complexion, ie where they’ve shifted the onus of pensions onto their employees; that is the more contemporary ‘defined contribution’ scheme.
Just remember, it’s not the overall size of the deficit that matters (there may not even be a deficit at the moment!), it’s the size of the pension scheme relative to the size of the business that should really concern you.
And if, we head into another lost decade for stocks, then expect to see more pensions heartache over the years to come.
Make no mistake, if the underlying business can’t afford its pension commitments, then the fund trustees will take your assets and sell them off.
Whatever you do, don’t let the millstone of former employees become a personal millstone for your investments.
• This article was first published in the free investment email The Right side. Sign up to The Right Side here.
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