Beruflich Dokumente
Kultur Dokumente
Plan Design,
Actuarial Valuation VS Accounting,
Funding VS Provisions,
Insurance Plans
CPD EVENT ORGANIZED BY THE JOINT CPD COMMITTEE OF PAF
AND ICAP KSA CHAPTER 13 December 2016
Abdul Rahim Abdul Wahab
Actuarial Consultant
Fellow of Society of Actuaries, USA (1995)
actuary.valuation@gmail.com
Abdul.Rahim@actuary.com.pk
Cell # 0092 320 926 27 23
1
WHAT IS COVERED ?
Inherent Advantages of Group Insurance
Risk Management
needs and risks
Salary is last drawn basic wages and excludes commissions, sales percentage, etc.
Portions of the year to be paid as well.
RR of 18% with 30 years of service cost is 8.33% of salaries
Estimated USD 25 billion liability in 2016 for Saudi EOSB which is unfunded.
Other Gratuity Benefit Schemes
Length of Service Gratuity Entitlements
Greater than 2 years but < 5 years 15 days last drawn Gross
Greater than equal to 5 years but < 10 years 30 Days last drawn Gross
Greater than equal to 10 years but < 15 years 35 Days last drawn Gross
Greater than equal to 15 years but <20 years 40 Days last drawn Gross
SOCPA
ttps://www.youtube.com/watch?v=dZ26tm0ovb4
Retirement Planning
ttps://www.youtube.com/watch?v=dZ26tm0ovb4
Retirement ?
L% survive from Age 30 to Age 60.
Only 1-L% never see retirement (death, disability, health benefits).
God does not wish to identify which group we belong to !!
Even if second group, concern to have families to support
Wives may live W yrs longer - men can RIP but still need to leave
something behind !!! Or Else ?
Do you wish to Retire before you Expire ? Or Expire before you
Retire ? Plan for both.
Focus on overall schemes and what they would achieve in real terms
20
Retirement Benefits Objective
Financial security to meet Self & Family Needs.
Needs at Retirement may be:
Income as well as Lump sum
Living expenses, childrens needs and Medical Expenses
Three legged stool is typical:
Government provided Social Security
Employer Retirement Plans
Personal Savings
Others - family assets, father in law !!
Value at end depends a great deal on regular savings and careful
investment and regular monitoring
21
REPLACEMENT RATIOS
RR used to compare the value of benefits from different retirement
schemes as well as adequacy of benefits in real terms
Net income before retirement SR. 10,000 per month starts receiving
SR. 7,000 after retirement by converting lump sums into a life annuity
for family, the replacement ratio is 70%.
24
Saudi EOS Benefit Replacement Ratios
Income Replacement Maths
REPLACEMENT RATIOS BENEFITS OFFERED
Monthly Basic salary Rs. 10,000. Gross : Basic Ratio 1.50 : 1.00
Net Income for RR= Gross less Tax @10% of Basic
Benefit Entitlement
EOBI 2.00% multiplied by min(basic,3000) for each year of service
Provident Fund Employer only monthly contributions @ 10% of basic salaries
Gratuity Last drawn basic salary for each completed year of service
Leave Encashment 50% of leave balance on gross (max. of 180 days encashment)
Medical (Hosp / Prol) Annual cost of insurance for life self and spouse
Replacement Ratios
120%
100%
80%
60%
40%
20%
0%
30 Entry Age 40 50
EOBI PF Gratuity Pension LE Medical Benev Income Gap
28
Components of Replacement Ratio Without Indexation
Benev
2%
M edical
8% Gratuity
LE
12%
4% Pension
31%
29
Replacement Ratio With future Indexation at 4%
Replacement Ratios
120%
100%
80%
60%
40%
20%
0%
30 EOBI PF Gratuity Pension 40
LE Medical Benev Income Gap 50
Entry Age 30
Components of Replacement Ratio With indexation at
4%
Pension
16%
LE
2%
Benev M edical
2% 5%
31
Meeting the Objectives
Way forward
Financial independence not achieved by current employer EOSB scheme.
Substantial gaps likely in Income needs
Major Medical expenses etc may be borne by children (with young children)
which is difficult for Low to Middle class families putting financial burden for
years to come.
Social family network good but is it likely to continue or should we prepare
ourselves to achieve financial independence from future generations ?
Employers/Regulation should consider the possibility of transfer of retirement
benefits between different employers with an incentive. Increases Savings in the
country and RR for employees.
Else employees who have changed a few jobs in mid thirties when they reach
retirement may not have a sufficient replacement ratio if not saved what received.
32
Meeting the Objectives
Way forward
GCC Expatriates
EOS benefit low 18% RR (10% with inflation adjustment)
Reliance on Savings / Accumulation during active service
Careful to save and invest for retirement while an Expatriate.
Employers to help in finding right savings vehicles else lots of
savings get depleted by wrong decisions / financial planners etc, who
do not disclose fully about there products with high commissions and
front end costs
Corporate Savings plans with Insurance component may be viable
options with mix of investment options based on life cycle.
GCC Locals schemes lucrative funding for payout could become a
major issue if funds not set aside based on Actuarial fully funded basis. 33
Cafeteria Plans; A missing concept
In the developed countries, the concept of Cafeteria Plans also generally referred to as flexible benefit
plans has become quite common.
This concept for all practical purposes does not exist in GCC and employers should consider at least
partial application of this concept in some areas of their employee benefit plans.
Such plans allow employees to avail those employee benefits that best meet their specific needs
instead of a single package of benefits that applies to all employees. For example, Cafeteria plans may
allow employees to select amongst the various group life, medical expense, disability, dental and other
plans that are offered. Cafeteria Plans may also allow employers to introduce new benefits to meet the
specific needs of the employees.
Although the details of the Cafeteria Plans may vary among employers, they have certain common
characteristics. First, the employer gives each employee a certain amount or credits that can be spent
on the different benefits or taken as cash. If taken as cash, the employers credits are taxed as income
to the employee.
Second, many cafeteria plans also make available an optional flexible spending account. A flexible
spending account also called a reimbursement account is an arrangement by which the employee
agrees to a voluntary reduction in salary, which can be used to pay for any plan benefits, unreimbursed
medical and dental expenses, dependent care expenses and other expenses.
Also, any additional amounts spent by the employee on the various benefits are generally with before
tax amount, which provide a significant tax advantage not relevant in GCC yet !!.
34
Savings
leading to
35
Actuarial Valuation VS
Accounting Provisions
IAS19 / IFRS
36
Actuarial Valuation of Retirement Benefit Schemes
37
Actuarial Valuation of Retirement Benefit Schemes
As an example, we have plotted a graph to illustrate the difference between the accounting provisions
and actuarial provisions for a sample employee with Saudi EOSB:
Particulars
38
Actuarial Liability vs. Accounting Liability
1400000
1200000
1000000
800000
600000
400000
200000
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36
ACTUARIAL ACCOUNTING
39
Actuarial Valuation of Retirement Benefit Schemes
Using the tools of discounting and withdrawal / death probabilities, actuarial reserves are built up to the
eventual payout amount at retirement age.
This illustration is for a single employee only. The overall savings would depend on the size of the payroll /
40
number of employees and their age and service profile.
Table of content
Objectives and scope
Post Employment
Short term Benefits
employee benefits EOSB, Pension, Medical, Life
Salary, leaves, medical, life,
Bonus payable within 12 mths
DB / DC Plan
https://www.youtube.com/watch?v=qM1LbsNwQeI
Post-employment benefit plans (such as pensions and health
care) are categorized as either defined contribution plans or
defined benefit plans.
DB / DC Plan
https://www.youtube.com/watch?v=qM1LbsNwQeI
Defined Contribution Plans
Employer liability to pay contributions Provident Funds
% of salary contributions by employer and employee
Investment direct or through Asset managers
Lump sum on exit
May have loans or withdrawals
Risks of Accumulation and Adequacy with the employee.
DC plans do not include plans with the following features:
Minimum level of benefit (regardless of fund balance)
Minimum return on fund balance by employer
Enhancement in benefits (constructive obligations).
Fully funded by definition No Actuaries !!
Accounting for DC plans:
Contribution is Cost
Contributions not paid is a liability
Accounting Treatment
Expense
when due Disclosure
Defined Benefit Plan
Employers obligation is to provide the defined benefits.
EOSB - Lump sum gratuity
Pension - a periodic payment (annuity for life, widow, children)
Benefits based on final (or average) salary and length of service.
Benefit uncertain as salary changes.
Other possible schemes:
Post retirement medical coverage for self and spouse
Encashment of accumulated leave balances
Defined Benefit schemes have Actuarial risk (costs change based on
actual cost of benefits) and Investment risk (assets under perform in
funded schemes or interest cost in unfunded schemes) for the
Employer.
However, employee has no risk as there is certainty of benefit payout.
IAS19 comes in to measure the employers obligation and risks.
Funding VS Provisions
DC schemes usually fully funded as contributions received.
DB schemes unfunded, partially funded or fully funded
Funding protects the retirement benefits funds from the employer entity risks.
Funding may be in the form of:
Trust funds - employer and employee trustees
Insurance policies with funds managed separately or in a pool
Mutual funds managed by asset management companies
Investment Rules set by Trustees / Employer - conservative in a DB plan.
In a DC plan - employees may choose range, risks, returns.
Funding of EOSB is hardly seen in GCC.
Funds within the entity for business purposes (capital) and the liability
remains on its books. No incentive to Fund (yet !) ? Estimated USD 25 billion
Who pays if employer has financial difficulties ??
ACCOUNTING FOR DB SCHEMES
IAS19 Accounting for DB Schemes
EOSB Scheme
Year 1 2 3 4 5
Current Past
Salary (SR) 10,000 ACT1 05-01-15 31-12-86 30 1.99 11,781 - 11,781 5,920 -
Service 1.99 Years ACT2 05-01-15 31-12-76 40 1.99 16,675 - 16,675 8,379 -
Salary (SR) 10,000 ACT1 05-01-12 31-12-86 30 4.99 38,318 16,467 21,851 7,679 -133%
Service 4.99 Years ACT2 05-01-12 31-12-76 40 4.99 45,546 16,467 29,079 9,127 -177%
DOJ 05-01-12 ACT3 05-01-12 31-12-66 50 4.99 47,307 16,467 30,840 9,480 -187%
78
Data Requirements
Active employees as at December 31, 2016:
Employee Number
Employee Name
Date of Birth
Date of Appointment
Contract type (limited / unlimited)
Monthly Salary as applicable to the scheme
(separately for last 3 years)
Grade / Designation
Sex (male/female)
52
Data Requirements
Exits from Active Population (during the last three years;
January 2014 to December 2016)
Employee Number
Employee Name
Date of birth of persons leaving employment
Date of Joining of persons leaving employment
Date of leaving
Mode of exit (Resignation/ Termination/ Death/ Disability)
Last drawn salary on which benefits are based
Benefits paid
Contract type (limited / unlimited)
53
Data Requirements
Exits from Active Population
Please provide the total number of existing employees and the total
withdrawals occurred over the last three years in the below format:
Termination
Resignation
Death /Disability
Transfers
Other Information
Please provide the Salary increase date
54 and the Expected future salary
increase rate.
Data Requirements
Accounts / PreviousValuation:
Rules for calculating EOSB benefits.
Accounts of the company as at 31st December 2015. If accounts are not available
than provide the liability movement under each entity in the below format:
Particulars Amounts in SR
Opening liability
Benefits paid
Closing liability
55
IAS19 DISCLOSURES OF A SAUDI
COMPANY (figures modified)
Expense for the Next Year
INDIVIDUAL AND
CORPORATE SAVINGS
PLANS
Less than SR 5,000 Less than SR 30,000 Less than SR 150,000
Best Values Individual Savings Plan Least Values Individual Savings Plan
Age 40 Age 40
Term 20 Term 20
Contribution 200,000 Contribution 200,000
Mode Annually Mode Annually
Cover Multiple Standard Cover Multiple Standard
Q&A