The Pension Scheme Problem FY2022: Part 1
Quote:
Originally Posted by
nztx
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?
Quote:
Originally Posted by
Snoopy
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
The Pension Scheme Problem FY2022: Part 2
Quote:
Originally Posted by
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