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Employee Benefits Trends in
Assumption and Experience
In accordance with Accounting Standard 15 revised 2005
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Employee Benefits Trends in Assumption and Experience
In accordance with Accounting Standard 15 revised 2005
2
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Table of Contents
About the Study
4
Executive Summary
5
Key Assumptions and Experience
6
o
o
o
o
Discount rates
Salary increases
Attrition Changes
Expected return on assets
8
10
12
14
Employee Benefits
o
o
o
Benefit schemes
Funding of Gratuity Plans
Scale of benefits
15
17
18
Our Solutions
19
Contact Information
20
About Us
21
Employee Benefits Trends in Assumption and Experience
In accordance with Accounting Standard 15 revised 2005
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About the Study
Aon Hewitt conducts continuous and extensive research on issues connected to the
employee benefits offered by the Indian companies. We present our first annual study of the
Assumptions and Experience in accordance with Accounting Standard 15 (Revised 2005)
among the companies across all sectors to report the major trends with regard to these. The
main aim of the study is to provide a snap shot around the change in financial and
demographic assumptions used to value the liabilities and their actual experiences.
We focus our analysis on the companies for whom we have performed valuations and the
relevant data is extracted data from our records of 2012-2013 and 2013- 2014.
Employee Benefits Trends in Assumption and Experience
In accordance with Accounting Standard 15 revised 2005
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Executive Summary
Aon Hewitt conducted a study on the assumptions used in the valuations of the employee
benefits in accordance with Accounting Standard 15 (revised 2005) of 300 plus companies in
India for fiscal year ending 31 March 2014.
This study analyses the assumptions consumed by the companies valuing the employee
benefits in compliance with AS 15 (revised 2005) on the accounting and disclosure of
employee benefits. The companies in the study are from various industries such as
automobile, banking, energy and power, engineering and manufacturing, FMCG, IT,
petrochemical, pharmaceutical and telecommunications.
The following is a summary of our key findings:

53% of the companies have a partially or a fully funded gratuity benefit plan and 47%
unfunded Gratuity Benefit Plan.

40% of the companies provide Gratuity Benefit without the Ceiling of Ten Lakhs
(Minimum requirement as per the Gratuity Act 1972) as against 58% of the
companies who have a ceiling of 10 lakhs when providing the benefit. 2% of the
companies have a hybrid gratuity plan.

While all the companies provide provident fund benefits, only 6 % of the companies
have an Exempt Provident Fund and they have made an accounting provision under
guidance note 29 (Guidance note 29) issued by the Institute of Actuaries of India.

Leave encashment benefit is provided by all companies and 77% have made an
accounting provision as well as disclosures for the benefit.

Sick Leave benefit is provided by all companies, however only 17% of the companies
have made an accounting provision as well as disclosures for the benefit.

2% of the companies provide post-retirement medical benefits and 3% provide
Defined benefit Pension. Of these, 100% have made an accounting provision and
disclosure for the benefit but none have funded the benefit.

7% of companies provide long service awards. Among them, 75% have made an
accounting provision towards the liability and 25% have given disclosures. All
companies have an unfunded benefit long service plan in place.
Employee Benefits Trends in Assumption and Experience
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Assumptions and Experience

Overall, the average discount rate has increased from 8.09 % in 2012-2013 to 9.07
% in 2013-2014. This is consistent with the increase in the government bond yields
from March 2013 to March 2014.

The overall long term salary increase assumption used for valuing the liabilities
across all sectors has remained the same at 8.9% during the periods 2012-2103 and
2013-2014.

While the long term salary assumption has remained consistent, the actual salary
experience has fallen slightly from 10.2% in 2012-2013 to 10.0 % in 2013-2014.

The overall long term attrition assumption used for valuing the liabilities across all
sectors has increased marginally from 12.6 % in 2012-2013 to 13.2% in 2013-2014.

After having plateaued for the last two years, overall actual attrition experience in
2013-2014 reduced to 18.5% (from 19.3%) in 2012-2013 on account of slow
economic growth and limited job opportunities.

Entry staff was at the highest risk of attrition, followed by junior management
employees.

Overall the expected rate of return on plan assets decreased by 0.8% from 8.65% in
2012-2013 to 8.58% in 2013-2014.
Employee Benefits Trends in Assumption and Experience
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Key Assumptions and Experience
Actuarial assumptions are a company’s best estimates of the variables that will determine
the cost of providing post-employment and long term benefits. Actuarial assumptions
comprises of Demographic and Financial assumptions
Demographic Assumptions include
 Mortality, both during and after employment;
 Employee Turnover
 Disability
 Early Retirement
 Claim rates under medical plans
Financial Assumptions include
 Discount rate
 Future salary increases
 Future Benefit increases
 In the case of medical benefits, future medical costs, including, where material, the
cost of administering claims and benefit payments
 The expected rate of return on plan assets
Actuarial assumptions are mutually compatible if they reflect the economic relationships
between factors such as inflation, rates of salary increase, the return on plan assets and
discount rates.
Employee Benefits Trends in Assumption and Experience
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Discount Rates Have Risen
AS 15 (Revised 2005 ) states that the discount rates should be chosen with reference to the
market yields on the government bonds at the date of the valuation. The currency and term
of the bond should be consistent with the currency and term of the expected benefit liability.
The discount rate has an inverse correlation with the value of the liability calculated, i.e. a
lower discount rate results in a higher disclosed benefit obligation and vice versa.
There was an uniform increase in the discount rate across all sectors between 2012-3013
and 2013-2014.
Overall, the average discount rate has increased from 8.09 % in 2012-2013 to 9.07 % in
2013-2014. This is consistent with the increase in the government bond yields from March
2013 to March 2014.
9.50%
9.00%
8.50%
8.00%
2013
7.50%
2014
While market movement should impact similarly, the difference in the discount rates from the
previous year to the current year is also due to the change in the future expected life of the
employees in the organization. If attrition in the organization is significantly on the higher
side, the government benchmark yield chosen will be of a lower tenure. However, the lower
tenure does not necessarily mean a lower discount rate as compared to the higher tenure
since during the last 5 years; there are several examples of scenarios where the gap
between the tenures is negligible.
Employee Benefits Trends in Assumption and Experience
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Graph given below indicates the government bonds yields over 5 Yr, 10 Yr, 15 Yr and 20 Yr
periods. From the graph, we can see that the yields on all tenures have moved significantly
from 31st March 2013 to 31st March 2014.
13.00
10.00
5.01
10.01
7.00
15.00
20.00
Employee Benefits Trends in Assumption and Experience
In accordance with Accounting Standard 15 revised 2005
1-Mar-14
1-Nov-13
1-Jul-13
1-Mar-13
1-Nov-12
1-Jul-12
1-Mar-12
1-Nov-11
1-Jul-11
1-Mar-11
1-Nov-10
1-Jul-10
1-Mar-10
1-Nov-09
1-Jul-09
1-Mar-09
1-Nov-08
1-Jul-08
1-Mar-08
1-Nov-07
1-Jul-07
1-Mar-07
4.00
9
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Salary Increases
While salary increase assumption has remained the same, actual salary
experience has fallen slightly
Estimates of the future salary increases take account of inflation, seniority, promotion and
other relevant factors, such as supply and demand in the employment market. The salary
assumption is very important while calculating the cost of any salary related benefit plan.
Few companies use different assumptions for initial years which are reflective of the actual
salary increases and a more long term conservative assumption for the later years.
Long Term Salary Increase Assumption Has Remained Consistent
The overall long term salary increase assumption used for valuing the liabilities across all
sectors has remained the same at 8.9% during the periods 2012-2013 and 2013-2014.
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
Employee Benefits Trends in Assumption and Experience
In accordance with Accounting Standard 15 revised 2005
2013
2014
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Actual Salary Experience Has Fallen Slightly
While the long term salary assumption has remained consistent, the actual salary
experience has fallen slightly from 10.2% in 2012-2013 to 10.0 % in 2013-2014.
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
2013
2014
The Highlights of the salary experience across various sectors:
The Pharmaceutical sector has the highest salary increase at 12.0% in 2013-2014.
Their salary increase in the previous year was at 12.5%.

The Hi Tech/Information Technology sector has experienced a marginal increase in
salary assumption at 10.2% in 2013-2014 from 10% in 2012-2013.

The salary experience of the financial Institutions is similar to that of the Hi Tech sector.
This sector experienced a slight increase at 9.1% in 2013-2014 when compared to 9.0%
in 2012-2013.

The Highest percentage increase of salary over the previous year was experienced by
the telecommunication sector, at 8.6%. The salary increase in 2012-2013 was 9.3% and
in 2013-2014 was 10.1%.
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Attrition Changes
Though the long term attrition assumption has increased, actual attrition
experience has fallen over the previous year
Long Term Attrition Assumption
The overall long term attrition assumption used to value the liabilities across all sectors has
increased marginally from 12.6 % in 2012-2013 to 13.2% in 2013-2014.
The Hi tech /information technology sector had the highest attrition assumption in 2013-2014
at 16.2% followed by financial institution sector at 14.9%.
17%
15%
13%
11%
9%
7%
5%
3%
2013
2014
Actual Attrition Experience Has Fallen Though Only Slightly
After having plateaued for the last two years, overall actual attrition experience in 2013-2014
reduced to 18.5% (from 19.3%) in 2012-2013 on account of slow economic growth and
limited job opportunities. Entry staff is at the highest risk of attrition, followed by junior
management employees.
Employee Benefits Trends in Assumption and Experience
In accordance with Accounting Standard 15 revised 2005
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25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
2013
2014
The Highlights of the actual attrition experience across various sectors:
The lowest attrition was seen in the manufacturing sector at 10.7% during 2013-2014
as against a 12.4% during 2012-2013.

The media/electronic print, Hi tech, Financial Institutions and Telecommunication
sectors saw high attrition rates compared to the other sectors.

While rest of the sectors saw a decrease in the attrition experience, the
telecommunication sector saw an increase in the attrition experience.

The attrition experience was almost the same in the current and the previous year for
the consumer products sector.
Employee Benefits Trends in Assumption and Experience
In accordance with Accounting Standard 15 revised 2005
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Expected Return on Assets Has Fallen
It is necessary to make a long term assumption on the expected return on scheme assets for
funded schemes. Usually this assumption should reflect the long term investment strategy of
the scheme. In India, the investments are restricted to a bond market or money market
based strategy. It is a requirement of AS15 (Revised 2005), to disclose the composition of
plan assets.
Overall, the expected rate of return on plan assets decreased by 0.8% from 8.65% in 20122013 to 8.58% in 2013-2014.
9.00%
8.80%
8.60%
8.40%
8.20%
8.00%
7.80%
7.60%
7.40%
2013
2014
The Highlights of the expected rate of return on Plan assets across various sectors:

Though the discount rates have risen considerably, the expected rate of return on plan
assets have more or less remained consistent. This is because, the expected return on
plan assets is based on long term market expectations for returns over the entire life of
the related Plan liabilities

40% of the sectors experienced an increase in the expected rate of return on plan
assets and the remaining 60% showed a decrease.
Employee Benefits Trends in Assumption and Experience
In accordance with Accounting Standard 15 revised 2005
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Statutory and Other Employee Benefits
In India, it is a statutory requirement for companies to provide Gratuity and Provident Fund
benefits to their employees.
Many companies in India offer other employee benefits such as Compensated absences,
Post-retirement medical benefit schemes, Superannuation Defined Benefit (DB) or Defined
Contribution (DC), Long Service awards etc.
120%
100%
80%
60%
40%
20%
0%
The Highlights of the employee benefits provided by the companies across various sectors:
While all the companies provide provident fund benefits, only six percent (6 %) of the
companies have an Exempt Provident Fund and they have made an accounting
provision under guidance note 29 (Guidance note 29) issued by the Institute of
Actuaries of India.

Leave encashment benefit is provided by all companies and 77% have made an
accounting provision as well as disclosures for the benefit.

Sick Leave benefit is provided by all companies, however only 17% of the companies
have made an accounting provision as well as disclosures for the benefit.
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
Two percent (2%) of the companies provide post-retirement medical benefits and
three percent (3%) provide Defined benefit Pension. Of these, 100% have made an
accounting provision and disclosure for the benefit but none have funded the benefit.

Seven percent (7%) of companies provide long service awards. Among them, 75%
have made an accounting provision towards the liability and 25% haven given
disclosures. The companies which have provided disclosures among them, no
company has made funding arrangement for the benefit and all have an unfunded
benefit plan in place.
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Funding of Gratuity Plans
Gratuity benefit plans may be unfunded, or they may be wholly or partly funded by
contributions from the company into an entity, or fund, that is legally separate from the
reporting enterprise, and from which the employee benefits are paid.
The payment of funded benefits when due depends not only on the financial position and
the investment performance of the fund, but also on an enterprise’s ability to make good
any shortfall in the fund’s assets
Gratuity is a defined benefit plan and In India funding for a gratuity benefit is not
mandatory. However majority of gratuity benefits are funded by the organization’s trust
fund or by an insurance company. Funding a gratuity benefit helps the organization set
aside assets to help meet the liability.
Gratuity Funding Arrangement
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Funded %
The Highlights of the Gratuity Funded / Non Funded Status

All of the companies provide gratuity benefit and Fifty two percent (53%) of the
companies have funded gratuity benefits.

The Pharmaceutical sector has the highest % of Gratuity schemes which is wholly or
partially funded at 76% followed by the chemical sector at 70%.
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Scale of Benefits - Gratuity Plans
Accordingly to statutory requirements, the scale of benefit for gratuity is half a month’s salary
for each year of service. There is an upper limit of INR 1,000,000 on the benefit amount.
Gratuity benefits higher than those under the statutory scale can be given, but this is entirely
up to the employer.
Gratuity Limit as Per the Act
40%
10 lac Limit
Hybrid
58%
No limit
2%
The Highlights of the Gratuity Limits as per the Act:

Forty percent (40%) of companies provide Gratuity Benefit without the Ceiling of Ten
Lakhs as per the Gratuity Act 1972.

While Two percent 2% of the companies have a hybrid gratuity plan and fifty eight
percent (58%) of the companies follow the ten lakh limit as per the Gratuity Act 1972.
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Contact Information
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Actuary and Practice Leader
Retirement & Financial Management
+91 9987769877
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Retirement & Financial Management
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