The Basis of the Estimation of Future Salary Hike

Charan Gupta Consultants Pvt. Ltd maintains its own website where it highlights the services it offers to the customers or clients. It treats the customers with utmost efficiency and dedication. It provides trustworthy solutions to client queries on employment benefits. The business offers a range of services to its customers including evaluation of gratuity liability, evaluation of leave encashment liability, evaluation of post retirement as well as medical benefit liability as well as evaluation of pension liability. The company offers a wide range of actuarial services to its clients. While making actuarial calculations the business requires making certain assumptions. These assumptions can be of financial type or demographic type. In this content, the selection of assumptions is highlighted.

Discount rate is an important assumption to make while performing actuarial calculations. The discounting period varies from 20 years to 30 years. The discount rate is based on the market yields on bonds that match with the valuation date as well as the discounting period. The bond rate can be obtained from the discount rate chart.

The company requires making estimates of future salary hike while performing actuarial calculations. The estimates of future salary hike depend on two components and they are :

  • Inflation
  • Ground Reality
Inflation:-

In the context of inflation it is important to say that government bond yearly variation can be 0.5%. When spread over a discounting period of 25 years, the variation becomes 0.02%. Since 0.02% is quite small therefore it can be safely ignored. However, to maintain the effective rates the salary increase should be adjusted by 0.5%.

Ground Reality:-

In the context of the other component “Ground Reality”, some companies have a consistent high salary increase and it can be 9.0% over a period of 3 years. However, the normal increase can be 6%. When this is spread across a discounting period of 25 years, it becomes 0.36% and this is quite substantial. In this case a selective discounting method can be adopted. This method involves the use of 9.0% salary increase rate for the first 3 years and after that the salary increase rate value is 6.0% for the remaining period of 22 years.