Discount Rate for Actuarial Valuations of Employee Benefits (December2015)

Discount Rate for Actuarial Valuations of Employee Benefits (December2015)

The discount rate used in actuarial valuations of employee benefit plans such as gratuity, pension, earned leave etc. is determined by reference to market yields at the balance sheet date on government bonds (refer Para 78 of AS15).

This means that these valuations are essentially Mark-To-Market (MTM) valuations, which can result in fluctuations in the valuation of liability if the underlying yield on government bonds fluctuates. As can be seen from the below analysis, the yield on the government bonds as on 31 December 2015 have marginally risen compared to yields as on 31 March 2015.

Bond Yields as at December 2015 and March 2015

Yields on the government bonds (except short duration bonds) as on 31 December 2015 have risen marginally compared to the yields prevailing as on 31 March 2015 (as well as compared to the yields prevailing as on 30 September 2015).

The chart below presents the comparison of government bond yields of various terms as on 31 December 2015 and 31 March 2015. This information can be used to determine the discount rate to be used for actuarial valuation as per AS15.

*Please note that the yields provided in chart above are interpolated yields in cases where a bond of exact term to maturity is not available. Please note that the government bond yields are quoted on semi-annual basis and yields in above chart have been annualised.

Source: www.investing.com and other websites publishing economic data.

The likely impact of marginal rise in Bond Yields

Actuarial valuations of employee benefits are usually long term valuations. Consequently, this rise in yields for bonds with longer outstanding term will translate into a rise in discount rate used in actuarial valuations, which in-turn is likely to result in some actuarial gain due to change in assumptions and hence a marginal decrease in valuation of liability. The decrease in liability because of the above rise in yields is likely to be around 1% to 3% of opening liability.