Today’s Exponential Investor predicts a boom in certain tech stocks. Based on the doom set to befall the companies they’ll disrupt. And that doom is pensions.
The underlying idea is very simple, but I haven’t figured out a snazzy name for it yet. Still here’s the concept explained in all its gory glory:
By making companies pay pensions, they become less competitive. And less competitive companies die off as newer leaner competitors take market share.
This applies between nations and companies. Wherever there’s a burden, there’s underperformance over time.
The German corporate model includes all sorts of stakeholders. And does a good job of that too. Many people admire things like having workers on the governing board.
But all this makes German companies less dynamic. And when it comes to pensions, it makes them less financially viable. It essentially adds a cost. Which is passed on to consumers, reducing sales.
Plenty of German companies are in decline. Not many have boomed out of nowhere.
Meanwhile, companies emerging out of communism have far fewer employee costs and benefits. That makes them vastly more competitive. Hence their boom.
In France, Holland and the UK, people are protesting about pension changes. But those changes are being made for a reason. The pensions are unaffordable. They hold back whoever the obligation is on.
Within industries, it’s the same. Older more established firms with enormous pension obligations are struggling to compete with more dynamic and efficient entrants.
Here’s a segment from a report we’re currently updating and re-issuing at The Fleet Street Letter Monthly Alert:
Dragged under by pension deficits
BHS is one of the first that springs to mind. The demise of BHS caused a real ruckus back in 2016 and the majority of everyone’s attention was quickly focused on its pension scheme. Once the company went into administration, it was revealed that BHS had a pension deficit of around £571 million.
Funding this gap proved to be a headache for billionaire Philip Green, who eventually agreed to hand over £363 million in cash to rescue the scheme. His “generosity” likely allowed him to keep his knighthood.
Carillion is another firm that shocked people with a wakeup call. Everyone became aware of Carillion and its failure in hindsight, but everyone seemed shocked and bewildered by its demise at the time.
As Matthew Vincent of the Financial Times highlighted, Carillion went from reporting very promising prospects for its future, to entering compulsory liquidation within just 258 days. Keep that in mind as you read the rest of this report.
An enquiry into the chaos behind Carillion’s collapse revealed an unfunded pension liability of £2.6 billion, resulting in 27,000 members facing reduced pensions.
Lessons still haven’t been learnt from these collapses either. The disintegration of Thomas Cook triggered the biggest peacetime repatriation and largest evacuation since Dunkirk. But it wasn’t just consumers that were left stranded. Mere days after the company filed for bankruptcy it was revealed that the company has a £500 million pension deficit.
And a few more examples from the report of companies currently struggling:
Anglian Water estimates the changes to its pension scheme will reduce some former employees’ pension pot by £100,000…
Recently, Royal Mail faced a 300% spike in pension contribution costs to £1.26 billion…
Thames Water’s pension scheme went from a £26.1 million surplus in 2008 to a £260 million deficit.
And then there was this from the Telegraph in July of this year:
The bailout of Kodak UK’s pension plan put a whopping £600million hole in the UK lifeboat fund’s reserve pot, it was revealed on Thursday.
All this sounds like bad news. And it is for pensioners.
But think about this from a tech investor’s side. What holds back many tech companies is the incumbents in the industry.
Kit Winder is preparing an Exponential Investor article about all the firms Google has bought and “retired” to cut competition. Many firms with revolutionary tech simply never manage to upset the status quo even if their products are better.
But if the incumbent firms are struggling or even failing, that’s what gives smaller firms the opening they need to succeed.
Every pension strike makes the alternative option look better. When coal miners strike, people change to other forms of heating. When rail strikes, people fly. When taxi drivers strike, people sign up to Uber. When university professors strike… well I’m not sure what changes. But you get the idea.
Death by inefficiency looks bad. But think of it as change towards a better option instead. An opportunity to accelerate change for the better. And that’s precisely the sort of change which tech investors benefit from. The speed of upsets, you might call it.
No doubt tech and trading expert Eoin Treacy is licking his lips at the opportunities which pop up each time a large conglomerate gets into financial trouble. And the pension crisis is getting plenty of them into trouble.
If you’d like to find out how he identifies such opportunities and vets them, he’s running a tutorial on his strategy today. You have hours left to sign up before it begins.
Eoin recently found a small firm that’s a “silent partner” in the rollout of 5G – something dominated by large and inefficient firms. If he’s right and this technology booms, it could be the last straw for all sorts of incumbent industries and firms. Not profiting from the boom is like failing to hedge your bets.
Until next time,
Editor, Southbank Investment Research