PGW - PGG Wrightson

[Snoopy]

I must say that I am finding this pension scheme representation in the books all rather baffling....

I am taking another dive into AR2017 to make some sense of things.

Various 'Actuarial Assumptions' (p62) are made about valuing the pension scheme assets. The present value of plan assets is $71.105m. This I expect is discounted by the listed discount rate of 2.97%. However we are told that inflation (and hence they say pension payments?) are forecast to increase at 2% each year. This means the apparent book value of the pension scheme will be eaten up faster in the future. So we need an additional discount factor to account for this.

We are told that the 'weighted average duration of the defined benefit obligation' is 8.5 years.

This means the undiscounted current balance should be calculated as follows:

UCB x [(1-0.0297)(1-0.02)]^8.5 = $71.106m => UCB x (0.9509)^8.5 = $71.106m => UCB = $109.09m

It seems reasonable to assume that this 'cash balance' will include some assumptions on likely earnings of the portfolio into the future, before it is ultimately redeemed. However, although we are told the superannuation investment has gone from a 79%/19%/2% Equities/Fixed Interest/Cash to 64%/28%/8% Equities/Fixed Interest/Cash, there is no mention of what the expected return on any of these investment categories is.

$109.09m - $71.106m = $37.984m

So take out the 'time value of cash' adjustments and we are looking at a percentage increase in portfolio value of around 50% over 8.5 years. That sounds do-able, albeit investment conditions would have to remain favourable for 8.5 years to achieve such a target. Perhaps this is why the actuarial calculations are telling PGW to top up? Or perhaps I have got the whole thing completely wrong!

SNOOPY

[winner69]

I am taking another dive into AR2017 to make some sense of things.

Various 'Actuarial Assumptions' (p62) are made about valuing the pension scheme assets. The present value of plan assets is $71.105m. This I expect is discounted by the listed discount rate of 2.97%. However we are told that inflation (and hence they say pension payments?) are forecast to increase at 2% each year. This means the apparent book value of the pension scheme will be eaten up faster in the future. So we need an additional discount factor to account for this.

We are told that the 'weighted average duration of the defined benefit obligation' is 8.5 years.

This means the undiscounted current balance should be calculated as follows:

UCB x [(1-0.0297)(1-0.02)]^8.5 = $71.106m => UCB x (0.9509)^8.5 = $71.106m => UCB = $109.09m

It seems reasonable to assume that this 'cash balance' will include some assumptions on likely earnings of the portfolio into the future, before it is ultimately redeemed. However, although we are told the superannuation investment has gone from a 79%/19%/2% Equities/Fixed Interest/Cash to 64%/28%/8% Equities/Fixed Interest/Cash, there is no mention of what the expected return on any of these investment categories is.

$109.09m - $71.106m = $37.984m

So take out the 'time value of cash' adjustments and we are looking at a percentage increase in portfolio value of around 50% over 8.5 years. That sounds do-able, albeit investment conditions would have to remain favourable for 8.5 years to achieve such a target. Perhaps this is why the actuarial calculations are telling PGW top top up? Or perhaps I have got the whole thing completely wrong!

SNOOPY

Snoops me old mate, you need to read things are bit more carefully

The $71.506m mentioned is not an asset - it’s the liability the fund has which has been calculated by the actuaries using the assumptions listed.

Problem is the fund has only $58m of assets to fund that liability

Did you notice the fund has disposed of the $1.6m of PGW shares they had a year earlier.

[Snow Leopard]

I am just going to keep quiet...

[Snoopy]

Snoops me old mate, you need to read things are bit more carefully

The $71.506m mentioned is not an asset - it’s the liability the fund has which has been calculated by the actuaries using the assumptions listed.

That depends on whose point of view you are looking at it from does it not? From the beneficiaries of the pension scheme , that $71.506m is an asset....

Problem is the fund has only $58m of assets to fund that liability

...even if PGW only has $58m in the pot to fund that asset. The point is, which ever way you look at things - according to the actuarial rules at least - there is not enough capital there to fund the pensions. But yes you are right, from the PGW perspective that $71.506m is a liability.

Did you notice the fund has disposed of the $1.6m of PGW shares they had a year earlier.

Yes I did see that. Not sure about the ethics of using the super fund to pump up the value of your own shares. Although in this instance by selling the shares they had, maybe they have pushed the PGW share price down? However, given the recovery in share price over the last year, it is probably a good idea to lock in some gains. I think PGW must be close to 'fully valued'. Then again you can say the same for most listings on the NZX.

SNOOPY

[winner69]

That depends on whose point of view you are looking at it from does it not. From the beneficiaries of the pension scheme , that $71.506m is an asset....



...even if PGW only has $58m in the pot to fund that asset. The point is which ever way you look at things, according to the actuarial rules at least, there is not enough capital there to fund the pensions

OK I’ll believe you re first point

Second point if all the assumptions made play out in reality yes they don’t have enough to pay the benefits out

One good outcome for shareholders would be if a lot of these pensioniors succumbed to a flu epidemic to eliminate a lot of the future liability ......take a punt and buy heaps of ATM shares so the gains could wipe out the ‘deficit’

Still think it’s funny (and ironic) shareholders are paying a decent pension to many who worked for companies PGW haven’t owned for ages. Not only company with this ‘problem’

[Snoopy]

Second point if all the assumptions made play out in reality yes they don’t have enough to pay the benefits out

But what are the growth assumptions for the funds under management Winner? Is there sufficient information in the annual report to calculate a guesstimate?

SNOOPY

[winner69]

Back to reality and leaving the worries about the pension fund behind us I take this is a profit warning

http://nzx-prod-s7fsd7f98s.s3-websit...451/268658.pdf

Think it says we are behind last year after Q1 but have hope, optimism, confidence and all nice things and remain well positioned to catch up over the rest of the year and do heaps better next year

[percy]

Back to reality and leaving the worries about the pension fund behind us I take this is a profit warning

http://nzx-prod-s7fsd7f98s.s3-websit...451/268658.pdf

Think it says we are behind last year after Q1 but have hope, optimism, confidence and all nice things and remain well positioned to catch up over the rest of the year and do heaps better next year

NPAT without property sales will be approx. 30% lower.

[Beagle]

http://nzx-prod-s7fsd7f98s.s3-websit...493/268690.pdf

So...with Net profit after tax 30% lower, and having largely completed hocking off the family silverware to try and top up the pension fund, and despite a huge bull run in local and overseas markets that must surely have provided really strong tailwinds for that fund, (tailwinds that must come to an end at some stage) one wonders how they are going to maintain dividends and continue to fund this expensive legacy superannuation fund ? Those dividend hounds assuming they can continue to pay the current levels of dividend might get a very unpleasant surprise in due course.

[iceman]

http://nzx-prod-s7fsd7f98s.s3-websit...493/268690.pdf

So...with Net profit after tax 30% lower, and having largely completed hocking off the family silverware to try and top up the pension fund, and despite a huge bull run in local and overseas markets that must surely have provided really strong tailwinds for that fund, (tailwinds that must come to an end at some stage) one wonders how they are going to maintain dividends and continue to fund this expensive legacy superannuation fund ? Those dividend hounds assuming they can continue to pay the current levels of dividend might get a very unpleasant surprise in due course.

Agree and that's why I exited this one again a couple of weeks ago