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Pension Liability Calculator for active employees

Objective

The purpose of the pension calculator is to estimate the liability of an employer who promises a pension to active employees. Although the pension calculator reflects the broad plan features of Indian Public Sector Enterprises, other employers offering defined benefit pension may also find the liability estimate to be useful. The results are subject to the assumptions outlined and would hold only if the pension is expressed as a percentage of the last drawn pensionable salary at exit.

Using the tool

Each field needs to be updated by choosing a value from the drop down menu, except for the ‘Yearly Pensionable Salary’. The ‘Yearly Pensionable Salary’ that is currently drawn by the employee needs to be entered manually. This is the annual salary to which the ultimate pension is linked. After having updated all the fields, please click on ‘Calculate Pension Liability’. Please click on the ‘Reset’ tab if you have to evaluate the pension liability for a different set of values.

Assumptions

Pension is expressed as a proportion of the last drawn Pensionable Salary at exit, and is subject to various assumptions viz.

1. Pensionable Salary Escalation Rate (includes inflation): This signifies the expected annual nominal % increase in the Pensionable Salary till the time to exit.

2. Withdrawal Rate: This rate represents the probability of the employee resigning from the organisation in each of the future years till retirement.

3. Pension Escalation Rate: This rate signifies the expected annual nominal % increase in pension that will accrue to the employee after exit.

4. Discount Rate: The discount rate is used to calculate the present values of the expected benefits, and reflects the Indian government bond yields.

5. Nearest Current Age: This is the employee’s present age.

6. Nearest Completed years served: It represents the completed years of service today.

7. Retirement Age: The normal retirement age options of 58 and 60 years of age have been displayed. Early retirement is measured from the withdrawal rate.

8. Mortality Rates: Mortality rates are drawn from the Indian Assured Lives Mortality 2006-08 Ultimate rates and LIC 1996-98 Ultimate Annuity rates.

9. Gender: The gender of the employee should be selected.

Each of these assumptions takes a limited set of values. The user may choose from the range of values appearing in the drop down list.

Scheme Rules

a. Vesting and Commutation

Considering the low employee withdrawal rates experienced by Indian Public Sector Enterprises the impact on the liability due to withdrawal is likely to be minimal, and hence vesting has been ignored. The option offered to employees to commute pension is considered to be neutral to the valuation results i.e., the payout matches the present value of the pension commuted.

b. Pension Value

As per the terms of reference of the Sixth Pay Commission as contained in the Ministry of Finance (Department of Expenditure) Resolution No.5/2/2006-E.III(A) dated 5.10.2006, the accrued pension is calculated as “Number of years served/40*Pensionable Salary at retirement”, subject to a maximum accrued pension at 50% of Pensionable Salary at retirement.

In the case of Indian public sector banks, the accrued pension is calculated as “Number of years served/66*Pensionable Salary at retirement”, subject to a maximum accrued pension at 50% of Pensionable Salary at retirement.

c. Family Pension

Family Pension has been considered in the liability estimate. For this purpose, the female (male) spouse of the male (female) employee is assumed to be five years younger (older). It has been assumed that the surviving spouse is the beneficiary of reduced pension at a 50% rate. Family pension to children of the deceased pensioner is ignored.

d. Fixed pension increase after age 80

The liability calculation allows for a 20% increase in the amount of pension receivable after the age of 80 by the main pensioner or his/her spouse. However, this ‘additional pension’ is likely to have an insignificant effect on the liability.

How accurate are the results?

As pension plan features could vary between employers, the actual valuation results could be different. The liability returned by the tool is likely to be an approximate reflection of the actual liability of the employer. To ensure a balance between simplicity and accuracy, standard rule-sets underlie the pension liability calculation e.g. minimum absolute pension is not allowed for.

Limitations

The Pension Liability Calculator does not substitute the detailed actuarial valuation. Its purpose is to enable an employer to understand with a broad brush the likely pension liability and the impact of a change in any of the assumptions on the ultimate pension liability.

A detailed actuarial valuation would ensure that the plan specific features are modelled. The results of the Pension Liability Calculator could differ markedly from those arising from the detailed actuarial valuation if the plan benefits and features are materially different.

Disclaimer

The tool is a mere guidance to employers who offer defined benefit pensions. It is customised to compute the estimated liability based on standard benefits as offered as per the terms of reference of the Sixth Pay Commission as contained in the Ministry of Finance (Department of Expenditure) Resolution No.5/2/2006-E.III(A) dated 5.10.2006, and adopted by Indian Public Sector Enterprises.

The tool is neither meant to substitute the pension scheme valuation results nor does it offer actuarial advice to its users. At best, the tool is indicative of pension liability and can be used to test sensitivity to various parameters within the permitted values. Ankolekar & Co. expressly prohibits users to consider the tool’s results for financial results, and is not responsible if users take decisions based on the tool’s output.