Actuarial Valuation of Employee BenefitsImpact of Social Security Code and COVID 19

Presentation at WIRC of ICAIBy

Date: 18-04-2021 Time: 11 am to 12:30 pm

1

Mr. Jayesh D. PanditPRINCIPAL

FCA, CAA

Mr. Kartikey KandoiCONSULTANT ACTUARY

FCA, FIAI

2

Agenda

Introduction to Actuarial Valuation

KAP Insights - COVID-19 & the Impact

The Code on Social Security, 2020

Actuarial Valuation Assumptions - Analysis and Impact

Actuarial Valuation - Calculation Example

Practical points in Actuarial Valuation

Q&A and Open Forum Discussion

I n t r o d u c t i o n t o

A c t u a r i a l V a l u a t i o n

Introduction

Short Term

Post Employment

Other Long Term

Termination

Employee Benefits

• Fixed

contributions

• No benefit

guarantee

• Known cost for

employer

• Majority financial

risk borne by the

employee

Defined Benefit (DB) Defined Contribution (DC)

• Fixed Formulae

based Benefits

• Unknown cost for

employer

• Majority financial

risk borne by the

employer

4

Actuarial Valuation of Employee Benefits

Communication

5

Gratuity Eligibility as per 10 Employees

Leave Provisions as per Shops Establishment Act

Para 70 of AS 15/ Para 72 of Ind AS 19 – Gratuity Provision even service less than 5 years

AS 15 & Ind AS 19 - Provision as per Projected Unit Credit Method

Detailed Disclosure to Notes to Accounts

K A P I N S I G H T S

C O V I D - 1 9 & T H E I M P A C T

7

KAP

Impact of COVID-19 on Employee Benefits

01

0302

The analysis conducted:

• FY 2019 v/s FY 2020 - Q1

• FY 2019 v/s FY 2020 - H1

• FY 2019 v/s FY 2020 - 9M

Between 550,000 and 650,000 employees

Effect on

the count of

employees

Effect on

Patterns of

leave

accumulation

Effect on

salary

8

KAP

KAP

Pattern of Leavers and New Joinees

Reduction in attrition over the first 2 quarters, 3rd quarter slightly higher attrition.

7%

12%

24%

4%

7%

13%

0%

5%

10%

15%

20%

25%

30%

March to June March to September March to December

Attrition Rate as percentage of opening members

2019 2020

9

KAP

KAP

Pattern of Leavers and New Joinees

Fewer New Joinees in the current year compared with 2019, slightly improved in Q3.

8%

17%

28%

2%

5%

12%

0%

5%

10%

15%

20%

25%

30%

March to June March to September March to December

New Joinees as percentage of opening members

2019 2020

10

KAP

KAP

Pattern on Salary Movement

Significantly few members received any salary increment till H1. This gap has reduced by Q3 end.

78%

87% 87%

10%

22%

69%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

March to June March to September March to December

% of Members getting Increase in Salary

2019 2020

11

KAP

KAP

Pattern on Accumulated Leave Days

Over 80% of employees having an increase in accumulated leave balances in 2020,

up from 70% in 2019

70% 72%

78%82%

85%82%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

March to June March to September March to December

Increase in Leave Days

2019 2020

12

KAP

KAP

What’s Next Post Unlock?

Should we realign

assumptions to

long term average

rate?

Outlook of

management for

future medium

term growth rate?

Impact on Leave

provisions if

specific measures

taken in this leave

policy year.

T H E C O D E O N

S O C I A L S E C U R I T Y , 2 0 2 0

14

KAP

KAP

The Code on Social Security, 2020

The Employees' Compensation Act, 1923

The Employees' State Insurance Act, 1948

The Employees' Provident Funds and Miscellaneous Provisions Act, 1952

The Employment Exchanges (Compulsory Notification of Vacancies) Act, 1959

The Maternity Benefit Act, 1961

The Payment of Gratuity Act, 1972

The Cine-Workers Welfare Fund Act, 1981

The Building and Other Construction Workers’ Welfare Cess Act, 1996

The Unorganised Workers Social Security Act, 2008

The Code

on Social

Security,

2020

15

Key Changes - Chapter V “Gratuity”

KAP

KAP

Applicable

SalaryWorking

Journalist

Definition updated

from Basic + DA to

‘Wages’

No Minimum vesting

criteria

Minimum Vesting

criteria relaxed from 5

years to 3 years for

Gratuity Eligibility

Fixed Term Employment

16

“Wages” definition

KAPTotal

Remuneration

Less

Exclusions

Basic + DA

+ Retaining

plus

Excess

Exclusions

“…this includes”

Social Security

Code, Section 2(88)

The specified exclusions, however may not exceed 50 percent of all remuneration, and in the event of

exceeding, such excess amount will be added in "wages"

01 02

17

“Wages” definition - Scenarios

Pay ComponentSSC Act

ExclusionCurrent

Basic Pay (35% CTC) 420,000 420,000 420,000

HRA Y 210,000

LTA Y 75,000

Conveyance Y 120,000

PF Employer Contributions Y 50,400

Gratuity Y 20,202

NPS Contributions Y 42,000

Special allowance 262,398 262,398

Variable Bonus ? 300,000

CTC incl. Bonus 1,500,000

CTC No Bonus 1,200,000

Wages for Gratuity (p.a.) 420,000 682,398 600,000

Wages for Gratuity (p.m.) 35,000 56,867 50,000

If Bonus considered…

Wages for Gratuity (p.a.) 420,000 982,398 750,000

Wages for Gratuity (p.m.) 35,000 81,867 62,500

57% of

CTC

65% of

CTC

01 02

18

About the study

1,000+ companies in 2020

31 March data

2016-2020

19

Basic to Gross Ratios – Year on Year

Year Less than 25% From 26% to 35% From 36% to 49% From 50% to 65%

2020 3% 16% 49% 32%

2019 4% 15% 48% 33%

2018 3% 19% 48% 30%

2017 4% 18% 48% 30%

2016 2% 17% 49% 32%

Percentage of companies with the following Basic to Gross Ratios

Companies may face an increase in the deemed “wages” for benefit calculations. For e.g.

if current ratio is 40% the deemed wages would increase by 25%.

Under

Interpretation

#2

20

KAP

KAP

Basic to Gross Ratios – Industry Wise

0%3% 9% 1%

2% 2% 2%

16%

24%21%

14% 17%11% 14%

35%

43%45%

48% 45% 58%57%

48%

29%26%

36% 37%30% 28%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Agriculture Information

Technology

Infrastructure Manufacturing Others Pharmaceutical Services

Less than 25% From 26% to 35% From 36% to 49% From 50% to 65% 1000+

Companies

in 2020

Sector

Gratuity Defined

Benefit Obligation at

31.03.2020 (INR Cr)

Approx. Percentage

increase

Agriculture 148 35%

Information Technology 435 49%

Infrastructure 333 41%

Manufacturing 894 38%

Others 363 36%

Pharmaceutical 558 28%

Services 624 29%

Grand Total 3,355 36%

While calculating the above increase in Gratuity liability, we have considered change only in applicable wages and have kept other

variable such as data, actuarial assumptions, and scheme constant as per each company’s previous valuation as on 31-03-2020

21

Impact of Social Security Code on Gratuity Provisions – Macro level

1000+

Companies

in 2020

22

KAP

KAP

Impact of Social Security Code on Gratuity

Provisions – Salary Definition

• Financial Assumptions

o Discount Rate : 8.00% p.a.

o Salary Escalation : 6.00% p.a.

• Demographic Assumptions

o Mortality Rate – IALM (2006-08)

o Attrition Rate – 10.00% p.a.

Example

• Monthly Basic +DA: INR 200,000

• Monthly Wages (SSC): INR 250,000

• Age: 42 years

• Service: 15 years

Valuation Assumptions

23

KAP

KAP

Impact of Social Security Code on Gratuity

Provisions – Salary Definition

1,730,769

1,211,429

2,000,000

1,256,922

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

Discontinuance Liability Projected Benefit Obligation

AM

OU

NT

IN

IN

R

Salary and Liability with maximum ceiling

Monthly Salary: INR 200,000 Monthly Salary: INR 250,000

1,730,769

1,522,314

2,163,462

1,902,893

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

Discontinuance Liability Projected Benefit Obligation

AM

OU

NT

IN

IN

R

Salary and Liability without maximum ceiling

Monthly Salary: INR 200,000 Monthly Salary: INR 250,000

Impact – Past service cost / Actuarial Loss?

24

Impacts of Wages Definition onOther Benefits

Impact on PF and ESIC contributions may be limited

Leave encashment impact depends on

The Shops and Establishment Act in respective states

Will be pertinent to see if NPS contribution

tax allowances and salary definition may change

A c t u a r i a l V a l u a t i o n A s s u m p t i o n s

A n a l y s i s a n d I m p a c t

Discount Rate

Communication

26

Based on Expected Working Term of Obligation/ Expected Future Service

Source – FBIL (mostly used by RBI regulated entities)

‘Fixed Income Securities’ tab under ‘GSEC’

Select required date in from and to, download G-sec excel file

Go to sheet >>Par-Yield. We need to select annualized rates.

3.50%

4.00%

4.50%

5.00%

5.50%

6.00%

6.50%

7.00%

7.50%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

An

nu

ali

se

d P

ar

Yie

lds

Tenure (Years)

Annualised Par Yields on G. Secs

(www.fimmda.org with prices/yields published by FBIL)

31-03-2020 31-12-2020 31-03-2021

27

Discount Rate Trend

KAP

KAP

Salary Escalation & Attrition Rate

Communication

28

Can be based on past trend and allow for future outlook

Assumption analysis at regular intervals

Category wise?

Short term/ long term

Service Specific/ Age Specific

Attrition Rate – Analysis Results

29

0%

5%

10%

15%

20%

25%

30%

35%

20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52

Pe

rce

nta

ge

Age Cohort

Age Specific-Attrition Rate p.a.

0%

5%

10%

15%

20%

25%

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34

Pe

rce

nta

ge

Service Cohort

Service Specific-Attrition Rate p.a.

Attrition rate lower for employees with lower service,

Attrition rate high at the younger ages.

While in Service Leave Availment Rate

Communication

30

The availment is expected leave taken in the future years out of the current accumulated balance.

Should be valued on CTC

Can be based on past trend and allow for future outlook

(Leave Availed - Leave Credited)/Opening Leave Balance

(Applicable only when availed days are greater than the current leave credited, else availment rate is 0%)

Alternative method - (Closing Leave Balance – Opening Leaves Balance)/ Opening Leaves Balance

Mortality Rate : Pre-Retirement

Communication

31

Indian Assured

Lives Mortality

2012-14 Ultimate

Indian Assured

Lives Mortality

2006-08 Ultimate

Male Insured Lives

Medically underwritten

0.000%

0.200%

0.400%

0.600%

0.800%

1.000%

1.200%

1.400%

1.600%

1.800%

0 10 20 30 40 50 60 70

Mo

rtalit

y R

ate

(%

)

Age (Years)

Comparison of Mortality Rates over IALM 2006-08 and 2012-14

over ages 18-65

IALM 2006-08 IALM 2012-14

Mortality Rate : Post-Retirement

Communication

32

Indian Individual

Annuitant’s

Mortality Table

(2012-15)

Indian Assured

Lives Mortality

2006-08 Ultimate

• All Genders

• Effective From 1st April, 2021

• Longevity increase by 2.61

years at age 60 years

0%

20%

40%

60%

80%

100%

60 70 80 90 100 110

Mo

rtalit

y R

ate

(%

)

Age

Comparison of Mortality Rates over IALM 2006-08 and

IAMT 2012-15 over ages 60 and above

IALM 2006-08 IAMT 2012-15

Mortality Rate : Post-Retirement

Communication

33

Indian Individual

Annuitant’s

Mortality Table

(2012-15)

Indian Assured

Lives Mortality

2006-08 Ultimate

• All Genders

• Effective From 1st April, 2021

• Longevity increase by 2.61

years at age 60 years

-

5.00

10.00

15.00

20.00

25.00

60 70 80 90 100 110

Lo

ng

evity Y

ears

Age

Comparison of Longevity (Life Expectancy)

IALM 2006-08 and IAMT 2012-15 over ages 60 and above

IALM 2006-08 IAMT 2012-15

A c t u a r i a l V a l u a t i o n

C a l c u l a t i o n E x a m p l e

35

KAP

KAP

Actuarial Valuation Method

Obligation = Projected Benefit x Probability x Discounting

Calculated for each:▪ Type of benefit payment

▪ Projected year till retirement age

▪ Employee

36

KAP

KAP

Actuarial Valuation Calculation Example

• Financial Assumptions

o Discount Rate : 8.00% p.a.

o Salary Escalation : 6.00% p.a.

• Demographic Assumptions

o Mortality Rate – IALM (2006-08)

o Attrition Rate – 10.00% p.a.

Example

• Monthly Eligible Salary: INR 85,000

• Age: 32 years

• Service: 2 years

Valuation Assumptions

Accrued Amount = 15/26*2*85,000 capped at INR 20 Lakhs = INR 98,077

Actuarial Valuation Calculation Example

₹ 9

8,0

77

₹ 1

03

,96

2

₹ 1

10

,19

9

₹ 1

16

,81

1

₹ 1

23

,82

0

₹ 1

31

,24

9

₹ 1

39

,12

4

₹ 1

47

,47

1

₹ 1

56

,32

0

₹ 1

65

,69

9

₹ 1

75

,64

1

₹ 1

86

,17

9

₹ 1

97

,35

0

₹ 2

09

,19

1

₹ 2

21

,74

3

₹ 2

35

,04

7

₹ 2

49

,15

0

₹ 2

64

,09

9

₹ 2

79

,94

5

₹ 2

96

,74

1

₹ 3

14

,54

6

₹ 3

33

,41

9

₹ 3

53

,42

4

₹ 3

74

,62

9

₹ 3

97

,10

7

₹ 4

20

,93

3

₹ 4

46

,18

9

₹ 0

₹ 50,000

₹ 100,000

₹ 150,000

₹ 200,000

₹ 250,000

₹ 300,000

₹ 350,000

₹ 400,000

₹ 450,000

₹ 500,000

323334353637383940414243444546474849505152535455565758

AM

OU

NT

IN

IN

R

AGE

Projected Accrued Amount

₹ 1

10

₹ 1

09

₹ 1

08

₹ 8

,59

1

₹ 8

,19

0

₹ 7

,80

9

₹ 7

,44

5

₹ 7

,09

9

₹ 6

,76

9

₹ 6

,45

4

₹ 6

,15

5

₹ 5

,87

0

₹ 5

,59

8

₹ 5

,34

0

₹ 5

,09

4

₹ 4

,86

0

₹ 4

,63

6

₹ 4

,42

3

₹ 4

,21

9

₹ 4

,02

3

₹ 3

,83

5

₹ 3

,65

5

₹ 3

,48

1

₹ 3

,31

3

₹ 3

,15

2

₹ 2

,99

7

₹ 2

5,9

11

₹ 0

₹ 5,000

₹ 10,000

₹ 15,000

₹ 20,000

₹ 25,000

₹ 30,000

32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58

AM

OU

NT

IN

IN

RAGE

Expected Payout

Projected Benefit

Obligation

INR 58,727

37

Impact of Change in Vesting Criteria

₹ 1

10

₹ 1

09

₹ 1

08

₹ 8

,59

1₹

8,1

90

₹ 7

,80

9₹

7,4

45

₹ 7

,09

9₹

6,7

69

₹ 6

,45

4₹

6,1

55

₹ 5

,87

0₹

5,5

98

₹ 5

,34

0₹

5,0

94

₹ 4

,86

0₹

4,6

36

₹ 4

,42

3₹

4,2

19

₹ 4

,02

3₹

3,8

35

₹ 3

,65

5₹

3,4

81

₹ 3

,31

3₹

3,1

52

₹ 2

,99

7₹

25

,91

1

₹ 0

₹ 5,000

₹ 10,000

₹ 15,000

₹ 20,000

₹ 25,000

₹ 30,000

323334353637383940414243444546474849505152535455565758

AM

OU

NT

IN

IN

R

AGE

Expected Payout with vesting criteria as 5 years

Projected Benefit Obligation INR 58,727 Projected Benefit Obligation INR 75,013

Expected cashflow for – Fixed term contract employees - ?

₹1

10

₹

9,4

54

₹

9,0

12

₹

8,5

91

₹

8,1

90

₹

7,8

09

₹

7,4

45

₹

7,0

99

₹

6,7

69

₹

6,4

54

₹

6,1

55

₹

5,8

70

₹

5,5

98

₹

5,3

40

₹

5,0

94

₹

4,8

60

₹

4,6

36

₹

4,4

23

₹

4,2

19

₹

4,0

23

₹

3,8

35

₹

3,6

55

₹

3,4

81

₹

3,3

13

₹

3,1

52

₹

2,9

97

₹

25

,91

1

₹0

₹5,000

₹10,000

₹15,000

₹20,000

₹25,000

₹30,000

323334353637383940414243444546474849505152535455565758

AM

OU

NT

IN

IN

R

AGE

Expected Payout with vesting criteria as 3 years

38

P r a c t i c a l a s p e c t s i n

A c t u a r i a l V a l u a t i o n

40

Practical aspects in Actuarial Valuation

KAP

KAP

KAP.

Directors Included?

Ind AS 24 Disclosure?

Benefit Scheme as per

policy and Actuary

Report

Contribution to

Gratuity Fund, Tax

Rule 103

Limit of Leave

Availment and

Encashment

Employee Transfer

within Group

Pension Valuation for

Regional Rural Banks

41

Common Errors Found by FRRB in

Implementation of AS 15 Employees Benefits

KAP

KAP

Source: The Chartered Accountant Journal April 2019

Non-provisioning of Gratuity (Matching Principle)

Inadequate disclosure in policy pertaining to liability for superannuation fund (Para 45)

No disclosure or inadequate disclosures pertaining to para 120

Defined Benefit Plan wrongly treated as Defined Contribution Plan

Non-Disclosure of para 47 (expense for Defined Contribution Plan)

Inadequate disclosure pertaining to para 65 (Use of PUCM Method)

O P E N F O R U M D I S C U S S I O N

43

Food for thought - Open Discussion

Wages definition - Statutory Bonus v/s Variable Bonus ?

PF Interest – On Opening Accumulated Balance or Current year contribution interest only ?

Impact of change in Gratuity Wage definition under Social Security code (Past Service Cost/ Other Comprehensive Income) ?

Companies likely to restructure CTC?

Discount Rate as Single G-Sec or Term Structure of G-Sec?

A N Y Q U E S T I O N S ?

• Actuarial valuations under

Indian and Global Accounting

Standards

• Financial projections for

management and funding

purposes

• Cashflow projections for

asset-liability assessments

• Trend and experience

analyses for appropriateness

of assumptions

Financial

Insights

Design and

Structure

Governance and

Administration

Our Solutions for Employee Benefits

• Advise on Retirement Trusts

set up and ongoing operations

• Regulatory advice

• Trust Documentation drafting

and approvals

• Trust accounting and

secretarial support

• Project management of Trust

operations

• Funding vendor selection

• Trustee Training workshops

• Design new employee

benefits

• Review existing designs to

optimize

• Assess cost implications of

proposed changes

• Draft handbooks / rules

• Presentation to

employees

Communication

45

We work for you, wherever your business takes you!

Thank You!

46

47

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