4 things you must ensure in Actuarial Valuations

4 things you must ensure / check in Actuarial Valuations

Actuarial valuations of employee benefits may not always be straight forward, in particular when the employee base is large or when the assumptions are changing. Having experienced actuarial valuations, here are 4 things which in my experience, a finance controller or an auditor must check / ensure in actuarial valuations of employee benefits:

1. Data Quality

If you torture the data enough, it will confess. And that is precisely what one needs to do before using any data for any purpose. Actuarial valuations are no exception.

Although the data used in actuarial valuations is usually the basic employee data, we observe that almost 50% of the cases have some sort of a data error (material or otherwise). Thus, I strongly suggest that following simple hygiene checks be carried out to ensure data provided for actuarial valuation is correct:

• Data completeness checks: Completeness of data is the extent to which the expected attributes of data are provided. Employee data provided for valuation is considered as complete if:

• Data of all employees has been provided.
• For each employee, all required information has been provided.

• Data accuracy checks: These checks consider whether the data values stored for an object are the correct values. There are two characteristics of accuracy: form and content. Form is important because it eliminates ambiguities about the content.

Accuracy checks are very important as they can have significant impact on the liability. For example, in one of the valuation, the date of joining was given incorrectly for certain employees resulting in incorrect calculation of completed years of service for those employees and hence incorrect valuation.

• Data consistency checks: Consistency of data here means that data provided for opening and closing actuarial valuations should be in synch with each other. If the same is not true, movements in liability can arise that may not be explainable.

For example, if the opening and closing salary details do not talk to each other at an employee level, one would get movements in liability that will not be explainable. We have seen this happen practically in many cases.

2. Appropriateness of Assumptions

The results of an actuarial valuation are going to be only as much valid as the assumptions. It is therefore imperative that enough attention is paid to assumptions used in actuarial valuations.

Some assumptions are of course more crucial than others (based on their potential impact on liability) and hence must be given more attention. For example, in a gratuity valuation, the salary growth rate is typically more important than the attrition rate which is typically more important than the mortality rate. In a pension or post-retirement medical benefit valuation, however, the mortality rate or the medical cost inflation becomes much more important as it impacts the number of years for which the pension / medical benefit will be payable after retirement.

The importance of any assumption can be determined by considering the sensitivity of the liability to change in assumptions, information typically included in actuarial valuation reports.

3. Liability (including movement analysis) and Expenses

Once you get the inputs (data and assumptions) right, the valuation results (i.e. the liability and the expenses) should ideally come right. However, to gain complete control and confidence over the numbers, one must see if the liability (and consequently expenses) is in line with the expectations. The same can be ensured by giving a close look at the following: