Actuarial valuation of long term benefit plans | Mercer

An actuarial valuation is an assessment of your future liabilities (as of the reporting date) calculated using an agreed set of forward-looking financial and demographic assumptions based on your company’s best estimates, preferably supported by historical data.

After an actuarial valuation, you will have insights into your:

• Defined benefit obligation, which represents the sum of each eligible employee’s accrued liabilities, based on accrued service but using the projected salary at each potential future exit date
• Service cost, which represents the sum of each eligible employee’s service cost, calculated as the present value of the employee’s benefit expected to accrue during the financial year
• Interest cost, is the cost due to fact that at the end of the year the employee will be one year to closer to the retirement.

Short-term benefits

• Typically, due within 12 months following the reporting date; e.g., wages, salaries, social security contributions
• Recognised when employee has rendered service in exchange for benefits
• No actuarial valuation required under standards

Post-employment benefits

• Offered after employee leaves service; e.g., retirement benefits (pensions or end-of-service gratuities), post-employment medical care
• Liability must be measured by actuarial methodology
• Service cost and interest cost recorded in income statement (P&L)
• Re-measurements due to changes in assumptions or experience adjustments reflected under OCI

Termination benefits

• Payable as a result of termination of employment (initiated by employer)
• Recognised as soon as employer can no longer withdraw offer of such benefits
• No actuarial valuation required under standards

Other long-term benefits

• Typically, due over a period beyond 12 months following reporting date; e.g., jubilee benefits, service awards, long-term disability benefits, end of service benefits
• Same accounting treatment as post-employment benefits, except that re-measurements due to changes in assumptions or experience adjustments recognised in P&L rather than OCI

Data

• Collect and validate data
• Reconcile membership data between two actuarial valuations
• Provide employee data summaries

Assumptions

• Analyse historical turnover and salary increase experience
• Engage HR to gain better insight into HR strategies and future workforce changes
• Recommend assumptions based on historical data analysis, discussions with the client and our experience in the region

Valuation

• Perform actuarial valuation and generate results
• Discuss results with HR and Finance
• Provide training by hosting knowledge transfer sessions
• Discuss results with the auditors

Report

• Provide complete disclosure set
• Support the transition from current to reporting standard
• Submit a comprehensive actuarial valuation report that satisfies all actuarial and accounting reporting standards, signed by qualified actuaries