Good morning. Let's start with AGA Rangemaster (LON:AGA), the maker of posh cookers. I like the company's turnaround potential as economies and the housing market recover, but the massive pension scheme deficit has put me off in the past. The recovery plan for their deficit stipulates that, having paid £20m into the scheme recently, they now have a breathing space until paying £4m in 2015. From 2016-2021 Aga must pay £10m p.a. into the pension scheme, with another £30m payable in 2020. So that is a total of £94m in payments due over the next few years! A huge amount considering the market cap is currently £74m at 103.5p per share.

I was amazed to read a short article on Aga in Shares magazine which didn't even mention the pension deficit here! So I suspect that some new investors are buying the shares unaware of the seriousness of the pension deficit, and that it could quite easily consume virtually all of the group's cashflow for the next eight years.

The narrative to the interim results (six months to 30 Jun 2013) published today do mention these overpayments, but interestingly they indicate that perhaps lower overpayments might be negotiated in the next couple of years:

 

 As market conditions alter and as the increase in yields on government bonds has a positive impact on the actuarial valuation of liabilities, it remains the intention of the Group to rebalance the relationship in terms of scale and financial strength between the scheme and the Company before any new formal funding arrangements are to be put in place in relation to the next triennial actuarial valuation to be undertaken as at 31st December 2014. 

 

The accounting deficit appears quite small, and the latest figures are scheme liabilities of an astonishing £828.9m (!!) and scheme assets of £813.3m, giving a deficit of only £15.6m. However, the nonsense of pensions accounting is such that a separate (and usually more conservative) valuation is agreed every three years, which drives the negotiated overpayments. So for the purposes of investors, we have to understand two completely different pension scheme valuations - one for the Balance Sheet, and a different (in this case much worse) valuation for overpayment calculations.

This is probably the biggest pension scheme relative to the market cap of the company that I…

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