Friday 4 August 2017

Actuarial Valuation of LTC Benefits: - Challenges Involved

LTC refers to Leave Travel Concession Benefit in the Indian Context. It is a type of employee benefit given to employees (mostly in case of public sector entities) for visiting home or Any where in India within a given block. Actuarial Valuation of LTC Valuation comes with many challenges which I am going to discuss herein below.

Before knowing the challenges of a LTC plan, I will like to quote an example of a LTC Plan. Other plans with similar structure are generally provided by different entities.

LTC Plan Provision:-
LTC is admissible to employees and members of their families once or more than once in a block period, generally it is two to four years with some extended time frame. Employees are provided the options like:-
(a)    Visit to home town
(b)   Visit to any place in India/Overseas
This may/may not be subject to maximum distance as per his/her entitlement
It can be done by payment of Cash assistance in case of actual journey.
It may also include entitlement of LTC to children of the employees from their place of study to place of posting of employee.
Besides this, employees may also be allowed to carry forward the non-availment of LTC in a block period to next block. Maximum leaves for LTC can also be ceiled while availing LTC.

Typical challenges involved in its Valuation:-
1)      What type of Plan it is ?
Short Term, Long Term, Post Retirement, Other Long Term Employee Benefit???
Since the benefit is not available after retirement and the block period exceeds time frame of one year, it qualifies the category of Other Long Term Employee Benefit. The definition is contained in AS 15 (revised 2005) :-
“ Other long – term employee benefits are employee benefits (other than post – employment benefits and termination benefits) which do not fall due wholly within twelve months after the end of the period in which the employees render the related services.”

2)      Non uniformity of Plan Provision?
Plan Provision that companies use for providing such benefit to their employees are non standardized and non uniform. Unlike Gratuity, there is no specific Act governing LTC Benefit. Companies use their discretion by adding more benefit or restrictions or vesting as they desire.

3)      Valuation to be done by projecting till retirement or till the current block?
      Here  “Accrual concept” a fundamental accounting assumption provide guidance,   
      which says that the cost of providing benefits to employees in return for the services   
      rendered by them in an accounting period should be accounted for in that period.      
   
      AS- 15 recognizes that the liability towards employee benefits should be provided as         
      and when the services are rendered. So, the accrued service of employee provide
      his/her entitlement to the benefit of the current block only not on all the blocks he/she
      is expected to get entitle till retirement. Hence, liability to be determine only for the 
      current block not of future blocks he may get till the date of retirement. Different
      views can be found on this particular point and may result in diverse practices.

4)      Methodology to be used?
AS – 15(Revised 2005), Ind AS 19 and IAS 19 (Revised 2011) recognizes Projected Unit Credit Method to determine the liability.

5)      Modeling?
 Modeling of LTC Benefit is complex by the fact of uncertainty involved in evaluating rate of availment, expenses involved, rate of increase of expenses, factors to be considered while determining rate of increase of expenses, involvement of family/ spouse and their respective mortality rates, determination of estimated term for determining discount rate, benefit structure not linked to salary, leave encashment if company policy etc.

6) Non Availability of past experience?
Many a times companies are unable to provide past experience resulting in increasing ambiguity/ complexity to workout required averages and related transition rates. Even if they have past experience, improper maintenance of proper accounts, which is generally a case with PSE, results in providing incomplete/ truncated data and information.

Views expressed in this article are mine and not necessary refer to my employer. Please feel free to contact for any queries or discussion!

Rajat Gupta
+91-8447077073
Manager: Actuarial Services
                        M.L. Sodhi Consulting Actuary
                                                                                                            guptarajat9617@gmail.com

                                                                                                                        

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