ACTUARIAL VALUATION EMPLOYEE BENEFITS -CA RAHUL JAIN

Why Actuarial valuation ? ACCRUAL VS CASH – employee benefits Eg: Consider an employee required to work for 25 days in a month with a pay of Rs /- which works out to Rs. 2000/- per day ParticularsMarch 2015April 2015 No of days worked2822 Excess Leave (3 )days 3 days Amount paid 50,000/- As per accrual concept 56,000/-44,000/-

Importance of Accrual Concept The employee gets paid say a gratuity of Rs. 10 Lakhs on retirement. As per the existing system the amount of 10 lakhs is recorded for an expense in the year 2030, but the same is payable for the continued service rendered by him for 15 years. The expenditure relates to 15 years. Hence a part of shall be recorded every year retirement

Employee Benefits  Classification as per Indian AS 15 ( Existing), Ind AS 19 ( New) and IAS 19 (International Standard)  Short term Employee Benefits ( Payable within one year) – wages, salaries, year end bonus, short term compensated absences.  Post employment Benefits – Gratuity, Pension  Other Long term benefits  Termination benefits - VRS

What is Actuarial Valuation?  Helps us in arriving at the amount to be set aside for meeting future liabilities  The fund created will reduce the burden on the company as the income generated out of those funds can be used for pay outs.  Gives us a picture of the financial health of a Retirement Plan  Measures the assets and liabilities of the fund at a specific point of time.

Why Actuarial Valuation?  Gratuity Scheme: Every company who has remained in service for a continuous period of 5 years will be entitled to a gratuity based on his last drawn salary computed at the rate of 15 days of his last drawn salary for every completed year of service.  Assumptions: Annual increment in salary Attrition rate Tenure of employment Return on investment Discounting rate

Actuarial Assumptions  To evaluate the potential liability, the actuary must make three estimates If a benefit will start When that benefit will begin What the benefit amount will be  Money is paid out of the System On employment termination On death of active member On disability On retirement

Actuarial Assumptions (Cont)  Amount of benefit depends on current and future service and on the extent of future pay increases  While the System awaits paying benefits, it invests funds and earns investment income to supplement contributions  Economic assumptions Salary scale Investment return Inflation Payroll growth rate

Actuarial Assumptions (Cont)  Demographic or non-economic assumptions Active members Death Termination Disability Retirement Retired members and survivors Death Disabled members Death or recovery

Burden reduces as the funds generate income.

Illustrative Example:  Age : 45  Completed years of Service: 15  Annual Pay 5,00,000  Benefit 2% p.a  Assumptions:  Retirement age: 60  Salary increase 5%p.a  Investment return - 8%p.a Last drawn salary is expected to be 10,40,000 (Approx) Total benefit payable – 10,40,000 * 2 % * 30 completed years of service = 6,24,000 This benefit is accruing over 30 years. Benefit Per year = 6,24,000 / 30 = 20800

Illustrative Example (Cont): Benefit Already accrued is * 15 years = Such benefit is payable after 15 more years. The value of liability to be recognized is the present value of discounted at 8 percent for 15 years Liability = / (1.08)*15 = The enterprise Should put aside funds equal to the above amount to meet its liability

THANK YOU By CA. Rahul Jain #