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Consulting Retirement and Financial Management Proprietary and Confidential Employee Benefits Trends in Assumption and Experience In accordance with Accounting Standard 15 revised 2005 Risk. Reinsurance. Human Resources. Consulting Retirement and Financial Management Proprietary and Confidential Disclaimer 1. Copyrights in this publication (both digital and analogue) vest exclusively with Aon Hewitt. This publication is for private circulation only and cannot to be shared with or distributed to any third parties without Aon Hewitt’s prior written consent. Any person resorting to unauthorized copying or use or attempts to do so shall make him liable to criminal and civil liabilities under existing laws. 2. Any disputes arising out of usage of this publication shall be governed by the laws of India. 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Employee Benefits Trends in Assumption and Experience In accordance with Accounting Standard 15 revised 2005 2 Consulting Retirement and Financial Management Proprietary and Confidential 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 3 Consulting Retirement and Financial Management Proprietary and Confidential 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 4 Consulting Retirement and Financial Management Proprietary and Confidential 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 In accordance with Accounting Standard 15 revised 2005 5 Consulting Retirement and Financial Management Proprietary and Confidential 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 In accordance with Accounting Standard 15 revised 2005 6 Consulting Retirement and Financial Management Proprietary and Confidential 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 In accordance with Accounting Standard 15 revised 2005 7 Consulting Retirement and Financial Management Proprietary and Confidential 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 In accordance with Accounting Standard 15 revised 2005 8 Consulting Retirement and Financial Management Proprietary and Confidential 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 Consulting Retirement and Financial Management Proprietary and Confidential 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 10 Consulting Retirement and Financial Management Proprietary and Confidential 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%. Employee Benefits Trends in Assumption and Experience In accordance with Accounting Standard 15 revised 2005 11 Consulting Retirement and Financial Management Proprietary and Confidential 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 12 Consulting Retirement and Financial Management Proprietary and Confidential 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 13 Consulting Retirement and Financial Management Proprietary and Confidential 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 14 Consulting Retirement and Financial Management Proprietary and Confidential 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. Employee Benefits Trends in Assumption and Experience In accordance with Accounting Standard 15 revised 2005 15 Consulting Retirement and Financial Management Proprietary and Confidential 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. Employee Benefits Trends in Assumption and Experience In accordance with Accounting Standard 15 revised 2005 16 Consulting Retirement and Financial Management Proprietary and Confidential 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%. Employee Benefits Trends in Assumption and Experience In accordance with Accounting Standard 15 revised 2005 17 Consulting Retirement and Financial Management Proprietary and Confidential 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. Employee Benefits Trends in Assumption and Experience In accordance with Accounting Standard 15 revised 2005 18 Consulting Retirement and Financial Management Proprietary and Confidential Our Solutions Quick Facts: Practice Lead is a Senior Actuary with over 20 years of experience in Life Insurance and Pensions RFM has pan India coverage with most consultants based out of Mumbai and Gurgaon Employee Benefits Trends in Assumption and Experience In accordance with Accounting Standard 15 revised 2005 19 Consulting Retirement and Financial Management Proprietary and Confidential Contact Information Chitra Jayasimha, FIA (UK) & FIAI (India) Actuary and Practice Leader Retirement & Financial Management +91 9987769877 +91 22 4034 5128 [email protected] Sukhveen Arora Retirement & Financial Management +91 9910788211 +91 0124-6221117 [email protected] Employee Benefits Trends in Assumption and Experience In accordance with Accounting Standard 15 revised 2005 20 Consulting Retirement and Financial Management Proprietary and Confidential About Us Aon Hewitt empowers organizations and individuals to secure a better future through innovative talent, retirement and health solutions. We advise, design and execute a wide range of solutions that enable clients to cultivate talent to drive organizational and personal performance and growth, navigate retirement risk while providing new levels of financial security, and redefine health solutions for greater choice, affordability and wellness. Aon Hewitt is the global leader in human resource solutions, with over 30,000 professionals in 90 countries serving more than 20,000 clients worldwide. For more information on Aon Hewitt, please visit www.aonhewitt.com Quick Facts #1 in Human Resources consulting and outsourcing firm in the world 30,000 employees 330 offices in 90 countries $ 4.3 billion combined annual revenue Serving over 805 of the Fortune 500 Employee Benefits Trends in Assumption and Experience In accordance with Accounting Standard 15 revised 2005 21