Changing Landscape of Employee Benefits in Global Actuaries Conference Mumbai

Organizer 19th Global Conference of Actuaries 30th 31st January, 2018 | Mumbai, India Khushwant Pahwa Founder and Principal Consultant KPAC KP Actuaries and Consultants www.kpac.co.in

19th Global Conference of Actuaries 30th 31stJanuary, 2018| Mumbai, India Changing Landscape of Employee Benefits post APS27: A practitioner s view 31 January 2018 15:50 Hours

19th Global Conference of Actuaries Agenda 30th 31stJanuary, 2018| Mumbai, India Introduction to APS 27 What it means? Reasonableness of Assumptions Conclusion

Changing Landscape of Employee Benefits post APS27: A practitioner s view 19th Global Conference of Actuaries Introduction 30th 31stJanuary, 2018| Mumbai, India Existing set of APS and GN were written spanning over more than a decade. They had many issues: There are overlaps Not updated to reflect the changes in accounting work Mix of principles and certain rules for specific purpose of actuarial advice. Did not cover all kind of work relating to employee benefits Given above, and the fact that the actuarial profession in India should aim at aligning itself to other global bodies, it was felt that AGPESS should do a major revamp of APSs / GNs to ensure the standards serve the changing needs as well as form comprehensive guidance to the members.

Changing Landscape of Employee Benefits post APS27: A practitioner s view 19th Global Conference of Actuaries Introduction 30th 31stJanuary, 2018| Mumbai, India AGPESS, thus, initiated revamping of the existing APS/GNs to move towards a more principlesbased approach. Objective: A comprehensive standard that is applicable across all type of actuarial advice in the area of employee benefits. It was recognised that it is also difficult to address specific topics, individual and unique circumstances through principles in APS/GNs. These are addressed through Technical Application Sections in APS that help illustrate the application of the principles to specific instances and contexts.

Changing Landscape of Employee Benefits post APS27: A practitioner s view 19th Global Conference of Actuaries What has changed? 30th 31stJanuary, 2018| Mumbai, India Effective 1 January 2018, APS 27 came into force and the number of governing APSs / GNs reduced from 10 to 4. APS / GN Number APS / GN Number What it covers What it covers GN 11 Actuarial Investigations of Retirement Benefit Schemes APS 27: Employee Benefits Investigation of Retirement Benefits - Choice of Actuarial Assumptions for the Actuarial Valuations Required under AS 15 APS 12 APS 15 Pension Fund Terminology APS 20 Actuarial Practice for Social Security Programmes Investigations of Retirement Benefit schemes: the actuarial reports under FAS 87, FAS 88 and FAS 132 APS 13 GN 29 - Valuation of Interest Rate Guarantees on Exempt Provident Funds GN 29 APS 14 Illustrations of Defined Contribution Pension Scheme Benefits APS 15 APS 18 APS 20 Pension Fund Terminology Retirement Benefit Schemes - Actuarial Reports Actuarial Practice for Social Security Programmes Actuarial Reports under Accounting Standard 15 (Revised, 2005) issued by the ICAI APS 26 GN 28 Guidance Note on Other Employee Benefits GN 29 - Valuation of Interest Rate Guarantees on Exempt Provident Funds GN 29

Changing Landscape of Employee Benefits post APS27: A practitioner s view 19th Global Conference of Actuaries What has changed? 30th 31stJanuary, 2018| Mumbai, India APS 27 provides principle based set of standards that apply to all actuarial work relating to employee benefits. Objective: Enable the user of actuarial work in the area of employee benefits to be able to place a high degree of reliance on the information s relevance, transparency of assumptions, completeness and comprehensibility, including the communication of any uncertainty inherent in the work. Framework of APS 27 is not technically prescriptive or designed to interpret specific legislation or rules, especially where the actual work is governed by legislation or another authority. However, there is Technical Application Section that outlines how some of the principles can be applied in the Indian context, given the nuances of the most prevalent type of employee benefit plans with which the members are involved. Thus, the core text of the Standard is divided into two key parts viz. the GENERALPRINCIPLES and the TECHNICAL APPLICATION SECTION .

19th Global Conference of Actuaries Agenda 30th 31stJanuary, 2018| Mumbai, India Introduction to APS 27 What it means? Reasonableness of Assumptions Conclusion

Changing Landscape of Employee Benefits post APS27: A practitioner s view 19th Global Conference of Actuaries What it means? 30th 31stJanuary, 2018| Mumbai, India Enhanced Quality of Reporting Better Choice of Assumptions Better understanding and management of Liabilities Addresses Reputational Risks

Changing Landscape of Employee Benefits post APS27: A practitioner s view Enhanced quality of reporting General Principles 19th Global Conference of Actuaries 30th 31stJanuary, 2018| Mumbai, India APS 27 has a lot of focus on quality of reporting. Some of the general principles contained in APS 27 around reporting include: Must ensure that role in a particular assignment is clear and understood. Must state the capacity in which he/she is providing actuarial advice, the scope, its purpose, and for whom the actuarial work has been performed. Must clearly state the extent to which any third party can rely on the actuarial work performed and its limitations for use by third parties. May place reliance on information received from a third party as an input to perform actuarial work. The information relied upon, its source and the extent of the checks applied in order to the accuracy and relevance of the information must be disclosed in the report. In case the assumptions are not determined by the member, the same must be clearly spelt out in his/her report along with his views on general appropriateness of the assumptions. Should state whether satisfied with the accuracy and sufficiency of the data. In case of any reservation as to the reliability of the data, appropriate qualification should be made therein.

Changing Landscape of Employee Benefits post APS27: A practitioner s view Enhanced quality of reporting Technical Application Section 19th Global Conference of Actuaries 30th 31stJanuary, 2018| Mumbai, India Technical Application Section (Section 9 of Standard) lists down specific considerations / reporting requirements for following routine actuarial valuations carried out for accounting purposes: Actuarial valuation of gratuity benefit Actuarial valuation of leave (Privilege / Earned, Sick etc.) benefit Actuarial valuation of pension benefit Actuarial valuation of post-retirement medical benefit scheme Actuarial valuation of long service awards Items which must be considered and demonstrated (i.e. reported) in an actuarial valuation report: Data: Example, in case of pensions / PRMS valuation, the Section requires that separate summary statistics of data be included for each beneficiary type i.e. current employees, retirees, spouse of retirees in case of death of the employee etc. Assumptions: Example, the Section requires disclosure of salary growth rate (including pensions growth rate), discount rate, attrition rate, mortality / disability rate, leave availment and encashment rate (in case of leave valuation), etc. In case of pensions / PRMS valuation, the Section requires that a description be provided of how mortality improvements that may have happened since the publication of mortality tables have been considered in the valuation.

Changing Landscape of Employee Benefits post APS27: A practitioner s view 19th Global Conference of Actuaries Better choice of Assumptions 30th 31stJanuary, 2018| Mumbai, India More focus and commentary on assumptions will follow post implementation of APS 27. This shall include: Factors that should be considered in determination of assumptions Talk on sensitivity of assumptions Talk on experience variance Stronger statements on practitioner s responsibility (and management s and auditor s responsibility) Talk on practioner s ability, based on circumstances of the case and access to information, to comment on the reasonableness of assumptions Potential qualification of report if the assumptions are found to be unreasonable All this will result in better determination of assumptions over a period of time.

Changing Landscape of Employee Benefits post APS27: A practitioner s view 19th Global Conference of Actuaries Will help in managing reputation risk! 30th 31stJanuary, 2018| Mumbai, India Actuaries have been questions for inadequacy of assumptions. Below is an extract of letter received by a practicing firm from a PSU client: Dear Sir, While carrying out the Actuarial valuation for leave encashment and Gratuity, assumptions for Salary increase and Interest earned are being made by you. In this connection we are in receipt of a query from Department of Public Enterprises which is reproduced as under:- It has been brought to the attention of DPE by Comptroller and Auditor General of India (C&AG) that C&AG, during the course of audit, have observed that there was a wide variation between the actual rate of increase in salary over a period of time and the rate of increase adopted for actuarial valuation while making provisions for leave encashment and gratuity. They have also mentioned that provisions made on inappropriate valuation worked out at a lesser rate goes to pad up the profits of the Company and to that extent does not represent a true and fair picture. You are requested to kindly give your views on the above observation specifically with respect to the assumptions made by you while carrying out actuarial valuation of Leave Encashment and Gratuity of ______. ___________ With better text in the reports, the reputational risks should be better addressed.

Changing Landscape of Employee Benefits post APS27: A practitioner s view 19th Global Conference of Actuaries Better management of liabilities 30th 31stJanuary, 2018| Mumbai, India APS 27 places great emphasis on the quality and importance of information disclosure in the actuarial reports. One of the main goal of an actuarial report is to provide the users of report with the information that proves useful to them in their decision making, which may relate to: Accounting and reporting Funding and Asset Liability Management Budgeting Benefit design and structure Better quality of reporting will ensure better understanding and consequent management of liabilities. Of course, this will happen over a period of time and not immediately!

19th Global Conference of Actuaries Agenda 30th 31stJanuary, 2018| Mumbai, India Introduction to APS 27 What it means? Reasonableness of Assumptions Conclusion

Changing Landscape of Employee Benefits post APS27: A practitioner s view 19th Global Conference of Actuaries Reasonableness of Assumptions 30th 31stJanuary, 2018| Mumbai, India In case the assumptions are not determined by the member but received as an input for the valuation (e.g. in case of valuations carried out to support accounting of defined benefit plans) and the member has relied on the same or has not validated the appropriateness or adequacy of the assumptions, the same must be clearly spelt out in his/her report along with his views on general appropriateness of the assumptions. Not a requirement with unreasonable intent but comes with many sets of practical challenges. Discussed in further slides.

Changing Landscape of Employee Benefits post APS27: A practitioner s view 19th Global Conference of Actuaries Role of various Stakeholders 30th 31stJanuary, 2018| Mumbai, India Aspect Actuary Management Auditor Check Check Provide Provide Check Check Data Advise Advise Decide Decide Concur Concur Assumptions Rely Rely Provide Provide Rely Rely Valuations / Results (Can question) (Can question) Provide Provide Disclose Disclose Concur Concur Disclosures Assist Assist Manage Manage - - Liability Management Role also supported by legal framework: Company law and Accounting Standards putting onus on the reporting entity Standards of Auditing putting onus of the auditors

Changing Landscape of Employee Benefits post APS27: A practitioner s view 19th Global Conference of Actuaries Role of various Stakeholders 30th 31stJanuary, 2018| Mumbai, India Requirement of SA 500 AUDIT EVIDENCE Evaluating the Appropriateness of the Management sExpert s Work Considerations when evaluating the appropriateness of the management sexpert s work as audit evidence for the relevant assertion may include: The relevance and reasonableness of that expert s findings or conclusions, their consistency with other audit evidence, and whether they have been appropriately reflected in the financial statements; If that expert s work involves use of significant assumptions and methods, the relevance and reasonableness of those assumptions and methods; and that expert s work involves significant use of source data, the relevance, completeness, and accuracy of that source data

Changing Landscape of Employee Benefits post APS27: A practitioner s view 19th Global Conference of Actuaries Various challenges in implementation 30th 31stJanuary, 2018| Mumbai, India When working for insurance companies, actuary independently arrives at assumptions Actuary is usually employed by the Company and hence internal to the organization. Thus, he has access to all relevant information about the Company and business. Internal vs. external When working for insurance companies, actuary has wide regulatory powers and access to the board. Presence of regulatory support brings in negotiating power, which may not exist with employee benefit actuaries. Lack of Regulatory Power Many companies not able to share necessary data for conducting detailed experience investigations. When working with insurers, actuaries control data. In this case, what option will practitioners have express inability? Availability of Data

Changing Landscape of Employee Benefits post APS27: A practitioner s view 19th Global Conference of Actuaries Various challenges in implementation 30th 31stJanuary, 2018| Mumbai, India Most Companies treat actuarial valuation of employee benefits as year-end compliance activity and do not engage in advance. At year-end, the time given to actuaries in some cases may not be sufficient to conduct detailed investigation around reasonableness of assumptions. Time Constraint There are less than 100 practitioners on employee benefits side and, even with limited level of compliance, more than 20,000 companies. Average number of reports signed in range of 500 to 1000 per actuary. As a profession, have we reached a stage wherein we have capacity to implement this? Client to Actuary Ratio Commenting based on incomplete information and in limited time may setup members in direct conflict with the clients and sometimes even with the auditors. There will be times when actuary has, based on his limited understanding, comments on inappropriateness of assumptions chosen whereas the clients and the auditors, with full view of the business, may believe otherwise. Puts Actuary at Risk?

Changing Landscape of Employee Benefits post APS27: A practitioner s view 19th Global Conference of Actuaries Puts Actuary at Risk? 30th 31stJanuary, 2018| Mumbai, India Consider salary growth rate assumption of following large listed companies: Company Salary Growth Rate Auditor Ashok Leyland Ltd. 3.25% Big 4 Jindal Steel and Power Ltd. 3% Not Big 4 Britannia Industries Ltd. 5% Big 4 Glenmark Pharma Lts. 3% Big 4 Cipla Ltd. 5% Big 4 Larsen and Tubro 5% Not Big 4 Shoppers Stop Source: Annual reports of respective companies (publicly available data) 4% Big 4 Management / director s responsibility statements indicate discharge of responsibilities concerning production of true and fair financial statement. Auditors reports in above cases not qualified in this regard. What should an actuary do in this case?

Changing Landscape of Employee Benefits post APS27: A practitioner s view 19th Global Conference of Actuaries What is the way out? 30th 31stJanuary, 2018| Mumbai, India Does expressing clear and loud inability to comment on reasonableness in valuation report tantamount to commenting on reasonableness of assumptions? For salary growth rate, should we have thresholds below which we should qualify reports or ask for evidence of reasonableness? Should there be different treatment for PSUs given the availability of evidence and size of provisions? Should we focus only on critical assumptions to begin with? What is the risk we expose ourselves to in doing this? Should we focus only on economic assumptions to begin with? What is the risk we expose ourselves to in doing this? Should practitioners be working together to evolve a solution that balances all factors addresses requirement to comment on reasonableness whilst considering the practical challenges and risks. Should there be further guidance from AGPEBSS / Council on this matter?

19th Global Conference of Actuaries Agenda 30th 31stJanuary, 2018| Mumbai, India Introduction to APS 27 What it means? Reasonableness of Assumptions Conclusion

Changing Landscape of Employee Benefits post APS27: A practitioner s view 19th Global Conference of Actuaries Conclusion 30th 31stJanuary, 2018| Mumbai, India Introduction of APS 27 is going to enhance quality of reporting carried out by practitioners working in the area of employee benefits. Introduction of APS 27 will improve understand-ability of actuarial reports by non-practitioners, including better appreciating the responsibilities of the actuary, management and the auditors. Introduction of APS 27 will enable the management and auditors to make better decisions about the choice of assumptions. Introduction of APS 27 will enable better understanding of these liabilities, which may pave the way for better management of these liabilities. Introduction of APS 27 will cause some immediate pain to actuaries (and in some cases, managements / companies) but will result in more peace of mind in medium-to-long term. Will be interesting to see how practice emerges on requirement to comment on reasonableness of assumptions.

Organizer 19th Global Conference of Actuaries 30th 31st January, 2018 | Mumbai, India Thank You k.pahwa@kpac.co.in +91-9910267727