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???
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
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