Actuarial valuation together with reporting of a pension scheme under the clause IAS 19 exhibits more significant complexity than observed in any other plans for employee benefits in India. Various issues which are frequently overlooked call for a proper understanding and allowance when it comes to reporting for pension schemes.

This blog post lists down details of a few issues which have indubitable importance as far as reporting a pension scheme under IAS 19 is concerned.

By and large, these issues apply to other comparable accounting standards, for example, Ind AS 19,ASC 715,AS 15 and FRS 17.

Wrong interpretation of pension scheme benefits

  • This is perhaps the most crucial issue associated with a typical pension scheme’s actuarial valuation.
  • Lots of actuary companies do a measurement of the pension scheme liability based on the estimated current value of payments required for the purchase of annuities or pensions from an insurance agent while retiring from or exiting the company.
  • Oftentimes they assess this obligation in relation to the annuity rates provided by the insurers.
  • Herein a particular thing needs to be absolutely clarified. The obligation of schemes offered by pension funds in India is the payment of benefits verified in accordance with the rules of the scheme.
  • Superseding this basic obligation by another to externally purchase a pension plan is inappropriate.
  • Well, one could claim that if purchasing an annuity is obligatory, then the situation has a marked similarity with the cost involved in directly providing pension benefits.
  • However, there are plenty of issues concerning an insurer’s annuity rates as stated below:
    • IAS 19 demands that the assumptions used to determine Defined Benefit Obligation (DBO) is nothing but the pension scheme sponsor’s (here it’s the employer) best estimates.
    • We may not have full awareness about the assumptions which the insurer may use in ascertaining the annuity rates.
    • Hence, this specific valuation method doesn’t adhere to the provisions laid down by IAS 19 and other accounting standards.
    • Furthermore, the annuity rates may display variation because of unforeseeable reasons like supply and demand equations, promotions, competitions, and regulatory changes.
    • If there’s an outstanding obligation, the insurer may well offer disadvantageous rates or even refrain from providing an annuity due to underwriting constraints.
    • Sometimes, when the time comes, the availability of an insurer who provides annuity benefits becomes uncertain.

Incorrect allowance for inflation-linked benefits

  • Numerous retirement schemes in India dole out pension payments that are associated with some form of inflation.
  • Actuarial firms who evaluate the obligation as depicted in the aforementioned first point are in need of finding annuity products.
  • These have a close resemblance to the inflation-induced pension offered by the scheme including the pension of any dependent or survivor which is highly improbable.
  • In a few markets, the insurers may not go ahead with offering inflation-linked annuities whatsoever.
  • So, there’s a high likelihood that the reported DBO pertaining to such schemes may be incorrect.

Not permitting for mortality improvements

  • Mortality improvement is considered as a vital assumption that has a major impact on the DBO.
  • Under IAS 19 in Para 82, pension reporting explicitly calls for an allowance to be made viable as regards future mortality improvements.
  • In case you have ignored this aspect and don’t qualify for any such improvements, then the recognized DBO as per IAS 19 is deemed inaccurate.
  • The assumption for mortality improvement ratio, especially in developed countries ranges between 1 percent and 2.5 percent each year. This aspect holds immense significance as life expectancy in developing countries is projected to exhibit a steady rise from short to medium term.
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