PGW - PGG Wrightson

[Snoopy]

All the Superannuation Fund financing issues goneburger, done and dusted - Snoopy ?

Errrrrr, I was hoping no-one would bring that up. After being 'solved' it would seem the pension scheme deficit is back! So what are PGW doing to solve it?

If we study the cashflow statements for the last four years, the actual cash required to prop up the pension plan is more than finds its way into the pension plan:

	Cashflow Lump Sum Contribution to Plan {A}	Contributions paid into Plan {B}	{A}-{B}	({A}-{B})/{A}
2017	$7.551m	$5.920m	$1.631m	21.6%
2018	$2.842m	$3.011m	-$0.169m	-5.9%
2019	$10.274m	$8.455m	$1.819m	17.7%
2020	$0.0m	$0.692m	-$0.692m	NM
Total	$20.667m	$18.078m

I do not understand why the 'cash flow attributed to propping up the pension plan' is not the same as the 'contributions paid into the plan'. Anyone know? I suppose it is the same in FY2020 ;-P. But whether the cash lost by shareholders doing this is $20.667m or $18.078m, it is still a lot of money. It accounts for all of PGWs long term bank debt of $20m going forwards in fact.

Still, at least the long term cash drain behind the scenes has shored up the pension plan at long last -right?
Unfortunately not, because the ten year government bond rate, a key driver in calculating the required pension fund asset position since the balance date of 30th June 2019 has declined from 1.57% in AR2019 to 0.91% in FY2020. The pain hasn't stopped either because as of today, nearly two months on from the balance date, the ten year cash rate is down to just 0.67%!

Very importantly, the earnings capacity of the company has approximately halved due to the sale of the seeds division. In this drought year in particular, earnings have collapsed to just $5m. That means the pension scheme deficit of $9.838m (approximately $10m) will need two years of PGW profits to be diverted to close the funding gap. The effective position of the pension plan for PGW shareholders, and even pension plan beneficiaries, must now be of significant concern. Yet in June 2019, the Group announced that they had brought the Plan to an 'actuarial equilibrium position', because they have their own calculation standards that are better than IFRS standards (apparently).

	Cashflow Lump Sum Contribution to Plan {A}	Contributions paid into Plan {B}	{A}-{B}	({A}-{B})/{A}
FY2017	$7.551m	$5.920m	$1.631m	21.6%
FY2018	$2.842m	$3.011m	-$0.169m	-5.9%
FY2019	$10.274m	$8.455m	$1.819m	17.7%
FY2020	$0.0m	$0.692m	-$0.692m	NM
FY2021	$0.563m	$0.960m	-$0.397m	-70.5%
FY2022	$0.0m	$0.567m	-$0.567m	NM
Total	$21.230m	$19.605m

We have an interesting situation in FY2020 and FY2022 where PGW contributed to the pension scheme without dolling out any cash. That is a very strange thing. One explanation could be that the managed pension scheme(s) into which PGW invests pay a dividend and that dividend is simply reinvested back into the said fund(s). Thus while no cash comes out of PGW coffers, they have forgone cash coming in by reinvesting that 'fund dividend' back into the fund that created it.

The above explanation shows how more money can be put into a pension scheme than by merely moving cash. It does not explain how in FY2017 and FY2019 a significant percentage of the funds contributed disappeared. There may be a clue in the cashflow statement where for FY2019 it says 'ESCT included'. ESCT stands for 'Employer Superannuation Contribution Tax'.

The ESCT rate paid per employee is set in advance of the tax year and does not change over that year. The rate of ESCT payable for each employee determines each employee's 'ESCT rate threshold'. This is calculated is by combining their annual salary or wages and the employers gross annual KiwiSaver employer contributions and is designed to mirror the tax rates paid under the PAYE income tax system. Taking FY2019 as an example, the 17.7% of contributed funds 'lost' is close to the 17.5% ESCT rate that applies to employees earning between $16.8k and $57.6k per year back in 2019

https://www.accounted4.co.nz/blog/po...-at-1st-April/

That sounds low until you remember that many of the people in that PGW superannuation scheme are already retired, and so may not be earning high incomes. People in that situation would drag the 'average' ESCT rate down. Thus this seems to be the most likely answer to my original question posed in the quoted text in bold. The 'missing' money disappeared as tax.

If this is the explanation, why was the percentage of tax taken off higher in FY2017? That is the opposite of what you might expect if wages increase with time. It could just be that the the average 'wage' decreases in retirement, and more people took retirement between 2017 and 2019, than took wage increases, thus causing the average 'wage' as seen by the pension scheme to fall. (We have to keep in mind that the pension scheme has been closed to new members for many years, so it will have an increasingly 'greying' profile.)

With the disappearing pension money over FY2017 and FY2018 finally 'explained', a new question arises in the 'in between' year FY2018. How did the pension scheme end up getting **more** money added to it by the company than was shown in the cashflow statement? There is a puzzle for the punters at home to ponder, and no I don't know the answer!

Back to nztx's question. The total defined benefit liability was $2.126m at the last balances date (30-06-2022) (See AR2022 p69). This is a marked deterioration over the EOFY2021 position where the figure was a surplus of $311k. I don't understand why more money ($960k) was being poured into a scheme over FY2022, when that scheme was in surplus at EOFY2021. Nevertheless it is just as well this did happen, because they scheme suffered a $2.437m 'value blowout' over the year. Without PGW's $0.537m contribution, the shortfall would have been close to $3m!

Interest rates have risen during the year and the value of share investments has generally fallen. Those two effects should be having opposite effects on the 'blowout deficit', and which effect is stronger is unknown. But who would bet against PGW continuing to bail out their pension fund, even if that bail out does tend to be more hidden in the accounts (using the trick of not taking income due, rather than stumping up cash) these days.

SNOOPY

[Snoopy]

As I predicted, the PGW pension plan continues to career out of balance. The ten year picture is shown below.

In the table below, I am effectively looking at the pension schemes as a 'black box' and observing the cashflow that comes in and out. The information in this table can be found in the respective annual reports under the header "Defined Benefit Asset/Liability" (e.g. Note 20 in AR2017).

PGW Pension Plan(s) External Cashflows

Financial Year	Pension Plan Deficit EOFY	PGW Contribution {A}	Members Contribution {B}	Total Contribution {A}+{B}	Benefit Paid {C}	Net Cash Movement {A}+{B}-{C}
2010	-$18.206m	$3.127m	$1.651m	$4.778m	($5.631m)	($0.853m)
2011	-$16.970m	$3.622m	$1.378m	$5.000m	($4.980m)	$1.398m
2012	-$26.264m	$2.727m	$1.363m	$4.090m	($3.819m)	$0.271m
2013	-$20.819m	$1.402m	$1.364m	$2.766m	($6.412m)	($3.646m)
2014	-$13.528m	$1.427m	$1.337m	$2.764m	($4.709m)	($1.945m)
2015	-$14.665m	$1.301m	$1.300m	$2.601m	($5.304m)	($2.703m)
2016	-$20.715m	$1.204m	$1.254m	$2.458m	($3.482m)	($1.024m)
2017	-$12.271m	$5.920m	$1.199m	$7.119m	($6.010m)	$1.109m
2018	-$7.722m	$3.011m	$1.170m	$4.181m	($8.914m)	($4.773m)
2019	-$5.883m	$8.455m	$1.268m	$9.723m	($14.044m)	($4.321m)
2020	-$9.838m	$0.692m	$0.832m	$1.524m	($5.301m)	($3.777m)
Bold Total		$18.078m

Why have I highlighted the contributions of PGW to the pension plan over the last four years only? In the FY2017 report, PGW states:

"Previous expensing of the return on plan assets for the 2014 through to the 2016 year (Snoopy note: if this 'expense' ends up being negative then profits increase) have now been recognised through other comprehensive income."

So for the years 2016 and older, the money that PGW have pushed into supporting the pension plan has been taken out of the headline profits. To show what has happened, 'Basic Earnings Per Share (Continuing Operations)' was listed as 5.3cps in the AR2016 'Statement of Profit & Loss'. Yet the equivalent comparative figure, also relating to FY2016 in AR2017 was 5.8cps. This difference was solely due to the removal of a $5.835m 'Remeasurement of Profit and Loss' (offset by a $1.634m 'Deferred tax on remeasurements of defined benefit liability') making a net -$4.201m 'item that will never be classified to profit and loss'. [see my post 4135 on this thread for more detail]

Yet this $4.201m pension plan propping is 'real cash' that otherwise would have been available to shareholders to pay higher dividends, or shore up the capital position of the company.

In the table below, I am effectively looking at the pension schemes as a 'black box' and observing the cashflow that comes in and out. The information in this table can be found in the respective annual reports under the header "Defined Benefit Asset/Liability" (e.g. Note 18 in AR2022).

PGW Pension Plan(s) External Cashflows

Financial Year	Pension Plan Deficit EOFY	PGW Contribution {A}	Tax Adjustment (1)	Members Contribution {B}	Total Contribution {A}+{B}	Benefit Paid {C}	Net Cash Movement {A}+{B}-{C}
2012	-$26.264m	$2.727m		$1.363m	$4.090m	($3.819m)	$0.271m
2013	-$20.819m	$1.402m		$1.364m	$2.766m	($6.412m)	($3.646m)
2014	-$13.528m	$1.427m		$1.337m	$2.764m	($4.709m)	($1.945m)
2015	-$14.665m	$1.301m		$1.300m	$2.601m	($5.304m)	($2.703m)
2016	-$20.715m	$1.204m		$1.254m	$2.458m	($3.482m)	($1.024m)
2017	-$12.271m	$5.920m	-$2.389m	$1.199m	$7.119m	($6.010m)	$1.109m
2018	-$7.722m	$3.011m	-$0.961m	$1.170m	$4.181m	($8.914m)	($4.773m)
2019	-$5.883m	$8.455m	$0.703m	$1.268m	$9.723m	($14.044m)	($4.321m)
2020	-$9.838m	$0.692m	$1,104m	$0.832m	$1.524m	($5.301m)	($3.777m)
2021	+$0.311m	$0.960m	-$2.694m	$0.782m	$1.742m	($3.907m)	($2.165m)
2022	-$2.126m	$0.567m	$0.706m	$0.816m	$1.383m	($3.265m)	($1.882m)
Bold Total		$19.605m	-$3.551m

Notes

1/ The 'tax adjustment' referred to here may be found in the 'Consolidated Statement of Comprehensive Income' of the respective annual reports from FY2017. More fully, the tax figure is the 'tax on re-measurement of the defined benefit plan' relating to the PGW superannuation scheme. Prior to FY2017 this tax adjustment was amalgamated within the income tax calculation in the "Statement of Profit or Loss'. A negative number indicates a tax payment due to be made, whereas a positive number indicates a tax refund.


--------------------------------------

Question/ Why have I highlighted the contributions of PGW to the pension plan over the last 6 years only?

Answer/ In AR2017 report p64, PGW states:

"Previous expensing of the return on plan assets for the 2014 through to the 2016 year (Snoopy note: if this 'expense' ends up being negative then profits increase) have now been recognised through other comprehensive income."

So for the years 2016 and older, the money that PGW have pushed into supporting the pension plan had been taken out of the headline profits. As an example of what has happened in the past, and how the accounting treatment has now changed, 'Basic Earnings Per Share (Continuing Operations)' was listed as 5.3cps (AR2016 p35 'Statement of Profit & Loss'). Yet the equivalent comparative figure, also relating to FY2016 in AR2017 was 5.8cps (AR2017 p35). This difference was solely due to:

i/ The removal of a $5.835m 'Remeasurement of Profit and Loss' OFFSET BY
ii/ a $1.634m 'Deferred tax on re-measurements of defined benefit liability'

making a net -($5.835m-$1.634m) = -$4.201m 'item that will never be classified to profit and loss'. [see my post 4135 on this thread for more detail]

Yet this net $4.201m pension plan propping was 'real cash' that could have had alternative possible uses such as:

a/ To pay shareholders higher dividends, OR
b/ To shore up the capital position of the company.

-------------------------------

Now, I have added up that effect for all subsequent years and I get the 'bold total' of $19.605m and I have to subtract from that any deferred tax liability on re-measurements of defined benefit pension scheme.

$19.605m - $3.531m = $16.074m

In todays terms, given that the number of shares on issue have been adjusted, to 75.484m at the latest balance date:

$16.074m / 75.474m = 21.3cps

This in my view is the 'cumulative since FY2017' net 'lost capital' per share of PGW shareholders as a result of maintaining the PGW 'in house' 'defined pension scheme'. 21.3cps, so far, has effectively been 'swept under the table' to an obscure area of the accounts where questions are not commonly asked. Please note I am not suggesting that PGW has done anything wrong by doing this. They are just following the accounting rule book that allows them to present their headline profit figures exactly as they have done. Nevertheless in presenting the performance figures quoted, I think it is fair to point out to shareholders what has legally gone on 'under the hood'. The other point to remember is that all of this is now historical.

SNOOPY

[Snow Leopard]

I wrote on 27-10-2017. Like nearly four & half years ago:

I am just going to keep quiet, occasionally look in on how this is 'progressing' and possibly allow myself a few smug moments...

I despair: Possibly I should say something.
Despair.jpg

[Snoopy]

I wrote on 27-10-2017. Like nearly four & half years ago:
"I am just going to keep quiet, occasionally look in on how this is 'progressing' and possibly allow myself a few smug moments..."
I despair: Possibly I should say something.

The above taken from your post 4149 dated 26-10-2017 on this very thread.

As a fellow shareholder it might be useful if you said something. After four and one half years, all of your slothful suntanning on those alpine rock outcrops is forgiven. I hereby grant you permission to reply.

SNOOPY

[Snow Leopard]

And thus the Snow Leopard pontificated:

Trying to square the circle of the accounts for any company or indeed any one aspect of any company over any length of time longer than the issuing of 2 annual reports (that being 1 year and 1 day) is fraught with perils because:
> The company changes;
> The accounting standards change;
> The reporting of accounts change.

The PGW Pension Scheme, here we go ...

[Snow Leopard]

Cash Flows:

Inwards:

1/ Employer Contributions:
Regular yearly payments made every year - tends to be hidden in employee costs in the main part of the accounts.
Lump sum payments made as necessary - tned to have their own line in the main accounts.

Shown in the Defined Benefit Tables net of taxes.
Gross payments include ESCT where appropiate. As an operating expense they are offset by the reduced companies tax.
becomes an asset of the fund and increases the fund value

2/ Employee Contributions:
Shown in the Defined Benefit Tables net of personal taxes.
This cash asset received gives rise to a equal liability

3/ Interest Earned:
This cash asset gives rise to a similar sized liability .

Outwards:

1/ Benefits Paid:
Reduces both assets and liabilities equally

2/ Current Service Costs:
Surely this is must be a cash outflow ?

[Snoopy]

I am going to preface my reply by saying that I am not and have never been an employee of PGG Wrightson, or any of its ancestral companies. Thus I am not privy to the exact details of the PGW 'defined benefit scheme', or indeed schemes as implied by the AR2022 text (p69).

"....provides a range of superannuation and insurance benefits for employees and former employees."
"Former employees are entitled to receive an annual pension payable for their remaining life and in some instances the remaining life of a surviving spouse."

My reading of the above quotes is that, for current employees, they will likely receive some kind of life insurance benefit should they not survive their employment term with the company. At retirement age, the surviving scheme members will receive an annuity, or pension for life, which must be on favourable terms. I say that because if the terms were not favourable, the working members of the scheme would stop all contributions and put that money into Kiwisaver instead (and that hasn't happened).

This 'defined benefit scheme' then is quite a different arrangement to Kiwisaver, where no ultimate return is guaranteed and instead the final payout, which some may nevertheless consider converting to an annuity at retirement, is left to the ebb and flow of the markets with no guarantee.

Straight away then, we can see that PGW is in an onerous position. PGW is investing in the markets to meet their contracted 'defined benefit' cashflow obligations. But should any of their investment decisions prove sub-optimal, PGW is required to make up any defined benefit plan shortfall in cash from their own coffers.

SNOOPY

[Snoopy]

Cash Flows:

Inwards:

1/ Employer Contributions:
Regular yearly payments made every year - tends to be hidden in employee costs in the main part of the accounts.

I put it to you that statement is an assumption. Before Kiwisaver, there was no expectation that employers would contribute to your retirement scheme. Instead you would 'do it yourself' by joining AMP or some other such provider. If we go to AR2022 p69, we see in table A that the 'Defined benefit obligation' shows a zero input from the employer. If there was such a 'regular employer contribution', as you suggest, that was hidden as part of the wage bill in the rest of the accounts, would you not expect to find it there separated out in that table?

The employer contribution of $567k is under a different header 'fair value of plan assets'. Could that be a 'lump sum' correction? I don't think so because under the lump sum correction header in the cashflow statement there is a nil entry for FY2022. So by a process of elimination I believe this 'non cash' fair value contribution of $567k represents the increase in value of the underlying investments that are used to fund the defined scheme.

Lump sum payments made as necessary - tend to have their own line in the main accounts.

Yes but over FY2022, there weren't any (refer to cashflow statement)

Shown in the Defined Benefit Tables net of taxes.
Gross payments include ESCT where appropriate. As an operating expense they are offset by the reduced companies tax.
becomes an asset of the fund and increases the fund value

I am not so sure about that. While the company pays the ESCT tax, they also pay PAYE income tax on behalf of the employee, If you look at the ESCT tax table, the tax deducted closely mirrors PAYE deduction rates. It looks to me as though ESCT is structured as though ESCT payments and any associated defined plan contributions are equivalent a 'salary sacrifice' for the employee. IOW, although ESCT is paid by the company, it is in fact an individual tax obligation, and not a company one. And if that is true, it means there is no increase in value of the fund due to ESCT.

2/ Employee Contributions:
Shown in the Defined Benefit Tables net of personal taxes.
This cash asset received gives rise to a equal liability

3/ Interest Earned:
This cash asset gives rise to a similar sized liability .

Agreed

Outwards:

1/ Benefits Paid:
Reduces both assets and liabilities equally

Yes

2/ Current Service Costs:
Surely this is must be a cash outflow ?

Current Service Cost / Fund Balance = $489k / 0.5x($56.483m + $53.725m) = 1%

Sounds like it could be a fund managers fee? If that is the case it will have been taken off the funds invested, so it would not be a cash outflow.

SNOOPY

[Snow Leopard]

Argh!

Now I remember why I don't try and help.

I am out of the apartment while the world's noisiest workmen rip the spouting off the roof and doing the editing to break this mess down into the different bits tin order to answer them is just to hard to do on a handphone.

I may go through it later or then again I might just keep quiet for another four and a half years.

I put it to you that statement is an assumption. Before Kiwisaver, there was no expectation that employers would contribute to your retirement scheme. Instead you would 'do it yourself' by joining AMP or some other such provider. If we go to AR2022 p69, we see in table A that the 'Defined benefit obligation' shows a zero input from the employer. If there was such a 'regular employer contribution', as you suggest, that was hidden as part of the wage bill in the rest of the accounts, would you not expect to find it there separated out in that table?

The employer contribution of $567k is under a different header 'fair value of plan assets'. Could that be a 'lump sum' correction? I don't think so because under the lump sum correction header in the cashflow statement there is a nil entry for FY2022. So by a process of elimination I believe this 'non cash' fair value contribution of $567k represents the increase in value of the underlying investments that are used to fund the defined scheme.



Yes but over FY2022, there weren't any (refer to cashflow statement)



I am not so sure about that. While the company pays the ESCT tax, they also pay PAYE income tax on behalf of the employee, If you look at the ESCT tax table, the tax deducted closely mirrors PAYE deduction rates. It looks to me as though ESCT is structured as though ESCT payments and any associated defined plan contributions are equivalent a 'salary sacrifice' for the employee. IOW, although ESCT is paid by the company, it is in fact an individual tax obligation, and not a company one. And if that is true, it means there is no increase in value of the fund due to ESCT.



Agreed



Yes



Current Service Cost / Fund Balance = $489k / 0.5x($56.483m + $53.725m) = 1%

Sounds like it could be a fund managers fee? If that is the case it will have been taken off the funds invested, so it would not be a cash outflow.

SNOOPY

[Snoopy]

Argh!

The correct spelling for that is 'Arrrrrrgh!' (according to Charlie Brown)

Now I remember why I don't try and help.

I am out of the apartment while the world's noisiest workmen rip the spouting off the roof and doing the editing to break this mess down into the different bits tin order to answer them is just to hard to do on a handphone.

I may go through it later or then again I might just keep quiet for another four and a half years.

Classic! Now I know why you seek the peace and solace of the mountain tops!

SNOOPY