Thanks a lot Randy for exposing the exact issue here.
I struggled with the same problem, and found an alternative approach to solving it (without the need to purge and re-install).
You can initialize the hgadmin repo manually and install the hooks, achieving the same effect as a normal installation. You need to to it as 'hg' user though.
Procedure
The commands worked for my environment (Ubuntu 10.04.4 / Hg 1.4.3)
First initialise a mercurial repository in /var/lib/mercurial-server/repos/hgadmin :
$ sudo su hg
$ cd ~/repos/hgadmin/
$ hg init
Then the only difference I found with a normally initialized hgadmin repo (that I deployed in a VM for comparison) were the hooks in .hg/hgrc file. So open the file :
$ vim .hg/hgrc
and paste this exact content :
# WARNING: when these hooks run they will entirely destroy and rewrite
# ~/.ssh/authorized_keys
[extensions]
hgext.purge =
[hooks]
changegroup.aaaab_update = hg update -C default > /dev/null
changegroup.aaaac_purge = hg purge --all > /dev/null
changegroup.refreshauth = python:mercurialserver.refreshauth.hook