Discount Rate for Actuarial Valuations of Employee Benefits (September 2015)

Discount Rate for Actuarial Valuations of Employee Benefits (September 2015)

The discount rate used in actuarial valuations of employee benefit plans such as gratuity, pension, earned leave etc. is determined by reference to market yields at the balance sheet date on government bonds (refer Para 78 of AS15).

This means that these valuations are essentially Mark-To-Market (MTM) valuations, which can result in fluctuations in the valuation of liability if the underlying yield on government bonds fluctuates. As can be seen from the below analysis, the yield on the government bonds as at 30 September 2015 have fallen compared to yields as at 31 March 2015.

Bond Yields as at September 2015 and March 2015

Yields on the government bonds have fallen during the first half of this financial year for bonds with outstanding term to maturity of less than 15 years. For longer term bonds, the yields have broadly remained same.

The chart below presents the comparison of government bond yields of various terms as at 30 September 2015 and 31 March 2015. This information can be used to determine the discount rate to be used for actuarial valuation as per AS15.

*Please note that the yields provided in chart above are interpolated yields in cases where a bond of exact term to maturity is not available. Please note that the government bond yields are quoted on semi-annual basis and yields in above chart have been annualised

The likely impact of fall in Bond Yields

As you shall notice, the yields on shorter term bonds (i.e. bonds with term of less than 15 years) as at 30September 2015 have fallen compared to 31 March 2015. For longer term bonds (15 years and above), the yields have largely remained same.

This fall in bond yields of shorter duration will translate into a fall in discount rate used in actuarial valuations, which in-turn is likely to result in some actuarial loss due to change in assumptions and hence a marginal increase in valuation of liability. The increase in liability because of the above fall in yields is likely to be less than 2% to 3% of opening liability.

Kindly note that the discount rate is not likely to fall in case of companies with expected remaining working life of 15 years or more (after adjusting for attrition and deaths). Hence, such companies may not experience any increase in liability.