Equity means justice, and in the case of stock equity it’s no different: it means a fair share. But what would you say if I told you that some of your fair share is being siphoned off?
What if I said that many of our largest companies are re-directing company assets to somebody else’s account?
You’d be mad, right?
Because of some disastrous promises made decades ago, this is exactly what’s happening. Companies are trying to hide the truth by sneaking assets off their balance sheets.
You might be very surprised by some of the culprits. You probably own a couple of these stocks yourself. And you need to be aware of the fact that this problem could turn very nasty in the months ahead.
Businesses are rotting from the inside
It’s pensions that are at the root of this problem. Many British blue chips simply can’t afford to continue with the pension promises they have made. Aon, the pensions consultancy, reckons there’s a private pensions gap of over £100bn in the UK.
That’s a massive burden for these companies to carry. But it’s an even bigger problem for the pension funds themselves, as they’re massive holders of equities.
As private pension schemes rot the balance sheet of British blue chips, pension funds themselves are getting worried. And they are turning on the companies.
What we’re looking at is nothing short of cannibalism.
How pensions are hollowing out the FTSE 100
You see, more and more companies are shifting assets off the balance sheet to make up the deficit in their pension funds.
The BP crisis has proved that even our largest corporations aren’t immune to disaster. Circumstances can change quickly, so trustees aren’t taking any chances any more. If the companies won’t pay up what’s due, they’re taking assets instead.
Diageo have shifted millions of maturing barrels of whisky into their pension scheme. M&S and Sainsbury’s have been putting properties into theirs. A report into the BBC’s pension black hole says they may have to raid their profitable corporate arm BBC Worldwide.
Instead of putting up cash, these guys are pushing the problem into the future. They’re putting up assets as collateral and hoping their luck’s about to change.
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They’re pinning their hopes on a continued recovery in the stock market to reduce the deficits. Diageo wants to buy the whisky back before it matures (and probably before anyone realises what’s going on).
But there’s a problem with all of this. Hollowing out corporations may put them at risk.
The savage fight for businesses assets
We’re told that shifting around these assets doesn’t matter. But it does. Once the assets are lodged as the property of the pension fund, the business can’t mortgage or sell them if they suddenly need cash. Remember BP? Luckily, they had assets to sell and borrow against when they were desperate for cash.
But there’s a growing pressure to raid the balance sheet. And trustees are showing some muscle in a bid to safeguard their members.
This asset stripping will put added pressure on share prices. In turn, pension fund deficits get bigger. Companies could end up in a vicious cycle, tapping off more and more assets – eating the companies alive in the process.
Take BT as an example.
How to avoid the pension rot
For years, analysts have referred to BT as a pension fund with a telco attached. BT’s got a big problem: a massive retired workforce being supported by a dwindling working one. As BT shows, the risk lies in the size of the pension scheme relative to the size of the business.
That’s what to look out for. If you own a stock in a company with serious pension liabilities, you need to consider how much damage these pension trustees could do.
This could be another nail in the coffin for UK stocks. And it’s another reason I’ve been diversifying my shareholdings abroad. I’m parking my money in countries that don’t have these ‘legacy employees’ to take care of.
Bear in mind, nobody knows the size of the pension liabilities because this story is still playing out. A weak stock market and a healthier bunch of retirees could be a disaster for some of our largest companies.
• This article was written for the free investment email The Right Side.
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