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Employee Benefits Trends in Assumption and Experience

In accordance with Accounting Standard 15 revised 2005


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 Discount rates 8

o Salary increases 10

o Attrition Changes 12

o Expected return on assets 14

Employee Benefits

o Benefit schemes 15

o Funding of Gratuity Plans 17

o Scale of benefits 18

Our Solutions 19

Contact Information 20

About Us 21



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.



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.



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.



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.



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.

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.

7.50%

8.00%

8.50%

9.00%

9.50%

2013

2014



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.

4.00

7.00

10.00

13.00

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20.00



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.

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2013

2014



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.

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%.

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2013

2014



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%.

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.

3%

5%

7%

9%

11%

13%

15%

17%

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.

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

2013

2014



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 2012-

2013 to 8.58% in 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.

7.40%7.60%7.80%8.00%8.20%8.40%8.60%8.80%9.00%

2013

2014



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.

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.

0%

20%

40%

60%

80%

100%

120%



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.



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.

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%.

0%10%20%30%40%50%60%70%80%90%

Gratuity Funding Arrangement

Funded %



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.

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.

58%

2%

40%

Gratuity Limit as Per the Act

10 lac Limit

Hybrid

No limit



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



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]

mailto:[email protected]



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

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