Salary Growth Rate: What are NSE 50 companies assuming

Salary Growth Rate: What are NSE 50 companies assuming

Why research Salary Growth Rate assumption?

Salary growth rate and discount rate are the two most important assumptions made while performing actuarial valuation of salary based employee benefit schemes such as gratuity, earned leaves, pensions, etc.

The importance of these assumptions is underscored by sheer sensitivity of the liability to these assumptions - a 1% change in any of these assumptions e.g. an increase in salary growth rate from 6% p.a.to 7% p.a. can have an impact of around 10% increase in the liability.

Also, salary growth rate assumption is often a point of discussion (perhaps debate) between auditors and the management, with auditors looking at the salary growth rates over the last few years and questioning something which is essentially a long term assumption.

As actuarial consultants providing advice and actuarial valuation services, we often receive request from our clients and their auditors to provide benchmarks against which they can validate their actuarial assumptions. It is in this backdrop that we undertook the research of actuarial assumptions, methodologies, practices and reporting adopted by NSE50 companies.

Why NSE50 Companies?

NSE50 companies are the largest corporate houses in India. They are also amongst the ones which are audited by the biggest audit firms in the country. It is therefore not unreasonable to expect the practices adopted by these companies to be amongst the best in the industry.

Despite the expectation of having adopted the best practices, as you shall notice from the research outcomes, we find that there are areas of improvements and scope of strengthening the assumptions even for these premium companies in India.