Assumptions are an integral part of performing actuarial valuations. Setting up actuarial assumptions involves reasonableness and acceptability is of prime importance. The Actuary's responsibility does not end with assisting company management and auditors in setting up of assumptions but also revolves around performing regular review of the appropriateness of the said assumptions by conducting a detailed analysis of Actuarial Gains and Losses.

As is true of some of the other assumptions, such as death, disability, and salary increases, the level of attrition experienced in the past is not known unless a study is made. Attrition experienced in the past can be affected for the future by many influences, so the study results should be altered as the result of other knowledge about factors expected to influence the employee group.

This study is based on a large body of company statistics and specific investigations have been deployed to derive such standard attrition rates.

Types of Significant Assumptions

While performing actuarial valuations of employee benefits, various financial and demographic assumptions are used. Some of the significant assumptions that impact the benefit costs are:

• Salary escalation rate: Salary escalation rate is the rate at which the salary increases. As most postemployment benefits are paid based on (Basic + DA)salary, the escalation rate should be considered on(Basic + DA) salary
• Mortality: Mortality rate is the death rate during a particular period of time. It is dependent on the age of an employee. At present Indian Assured Lives Mortality(2006-08) Ultimate tables are used for the purpose of actuarial valuations in India.
• Discount rate: Discount rate is the rate used to determine the present value of future payouts. The discount rate should be determined with reference to market yields on government bonds or high quality corporate bonds as on the balance sheet date for relevant term and currency, as required as per the accounting standard on employee benefits as applicable.
• Attrition rate: Attrition rate represents the employee withdrawal other than on account of retirement and death. Usually entities provide a flat rate of attrition but it has been observed that attrition rate is dependent on the service or age of the employee. For example, the entity can use x% for service below 5years, and y% for above 5 years instead of a flat rate of z%.

Why would we conduct an analysis for Attrition rates?

The purpose of this paper is to describe the basic level of attrition rate using the industry, size of a company, age and service classification as a guide. Although attrition rate is only one of the several actuarial assumptions that must be selected, it is an important one in terms of theeffect it has on employee benefit costs. Attrition rate is significant in deciding the future expected cash flows and has a direct impact on obligation. Attrition assumption is the most difficult assumption as it dependent upon theage and service slab, sex, geography, industry and the pay scale of a particular employee. Thus the choice of the appropriate level of overall attrition is of decisive importance.

Data Collation:

For trend analysis of attrition rate, employee data investigation was performed over the last 4 years. Thedata was gathered from March 2013 to March 2017. The companies active as on F.Y. 2013 were 2994 which subsequently increased to 3275 companies in F.Y. 2017.For the purpose of this investigation, we have used the data of 1997 common companies (i.e. Companies active from F.Y. 2013-17).

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Mutual companies are further grouped into three categories based on employee strength, viz. "Small Company", "Medium Company", and "Big Company”.

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Methodology:

For the analysis of employee attrition rate, we have made use of employee data set compiled for the purpose of gratuity valuations over the analysis period. From 2010 onwards we started our own SQL based software for employee benefit valuations with the primary objective to perform qualitative and quantitative work while honing our ability to handle a large set of employee specific data. Valuation software is available to store/reuse uploaded data which is kept in a highly secure dedicated server for each of the valuation date.

As at 31-03-2013, active employee data available for gratuity valuation was approximately 2.2 million for 2994companies. Out of 2994 there were 1997 companies which stayed over end-to-end valuation period with employee count of 1.6 million.

For the purpose of analysis, we extracted the employee ID, date of birth, date of joining and normal retirement age for each company/employee at each valuation date of 31-03-2013, 31-03-2014, 31-03-2015, 31-03-2016 and 31-03-2017. However for the analysis of employee withdrawal a select period of [4] years from March 2013 is used to arrive p.a. attrition rate.

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Employee Distribution as at 31-03-2013

At each valuation date, age and service of individual employee is calculated to lower absolute value integer. In respect of employees who were active for companies which are selected for analysis as at 31-03-2013, we summarized 1.6 million employee data as follows:

• Age
• Service
• Normal Retirement Age
• Industry Type

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The Table below summarises the common employees as at 31-03-2013 for companies which are selected foranalysis. This was further used to check how attrition rate varies among various industries.

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Collated information of employees which were active as at 31-03-2013 were compared with active employees as at 31-03-2017. This was done by making an Age - Service matrix, which is based on survival status and time-to-time information available for exits.

The graph below shows members beginning at as 31-03-2013 and members retained at 31-03-2017. The area between the two curves represent the employees who have left.

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It can be perceived from the above data point on the graph that the population size was 69,122 for employees aged 30as at 31-03-2013 which reduced to 42,516 as at 31-03-2017. This observation shows that around 26,606 employees have left during the 4 year time period. Hence, the attrition rate for age 30 is 38.49% over 4 years, which comes to 11.44%p.a.

As the select period for the analysis of attrition trend is 4 years, we have restricted the sample for retained employees as at 31-03-2013 at age 53.

Results:-

Results for per annum attrition rate were analyzed as follows:

                                                                                              a) Attrition Rate – Age Specific

We can observe a trend that the younger employees are now working for the same company for a shorter duration than in the past. Attrition assumption tends to be higher at the younger ages and falls as the employee gets older. The graph reflects a small up-turn at the older ages as some employees opt for early retirement.

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                                                                                               b) Attrition Rate – Service Specific

Graph 7 shows the correlation between attrition rates and years rendered in service. The graph reflects higher attrition for employees with lower service and conversely the attrition decreases as the service of an employee increases. Appreciation at work, job security, opportunity for advancement are few of the main reason why a lower attrition rate is reflected at the higher service range. However, a steady increase in attrition is reflected after 28 years of service as an employee tends to leave the organizations on account of retirement.

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                                                                                               c) Attrition Rate – Industry Specific

Table 4 gives industry specific bifurcation of attrition rate. The highest attrition rate is observed in Out placement Services / BPO / KPO whereas the lowest attrition rate was in Banking of 2.65% p.a.

The Attrition rates tabulated above are further analysed for various sectors, which are tabulated as below:

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It can be observed from the above age and service range that attrition rates are specifically higher when the serviceand age of an employee is below 5 and 30 years respectively. Hence, it is recommended to use a staggered attritionrate when required, would project the liability more appropriately.

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                                                                                            d) Attrition Rate – Company Size                    

Impact of Attrition Rate on the Projected Benefit Obligation

Accounting by an enterprise for defined benefit plans involves:-(a) Using of actuarial techniques to make a reliable estimate of the amount of benefit that employees have earned in return for their service in the current and prior periods. This requires an enterprise to determine how much benefit is attributable to the current and prior periods and to make estimates (actuarial assumptions) about demographic variables and financial variables that will influence the cost of the benefit

(b) Discounting that benefit using the Projected Unit Credit Method in order to determine the present value of the defined benefit obligation and the current service cost.

Consider an enterprise is offering a gratuity benefit to its employees. For provisioning of obligation, an enterprise will have to make a provision of gratuity, calculation of which is illustrated as below

The ultimate cost of a defined benefit plan may be influenced by many variables, such as final salaries, employeeattrition rate and mortality. The ultimate cost of the plan is uncertain and this uncertainty is likely to persist over along period of time. In order to measure the present value of the post-employment benefit obligations, it is necessaryto:

(a) apply an actuarial valuation method;

(b) attribute benefit to periods of service; and

(c) make actuarial assumptions

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An enterprise should use the Projected Unit Credit Method to determine the present value of its defined benefitobligations and the related current service cost and, where applicable, past service cost. The Projected Unit Credit Method (sometimes known as the accrued benefit method pro-rated on service or as the benefit/years of service method) considers each period of service as giving rise to an additional unit of benefit entitlement and measures eachunit separately to build up the final obligation.

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For calculation of Projected Benefit Obligation

a) Accrued amount calculated as at effective date is projected till last age of exit i.e. till normal retirement age, using 6.00% p.a. salary escalation rate.

b) Decrement adjusted expected payout at each age is calculated by multiplying mortality, attrition rate and/or survival chance with projected accrued amount.

c) Projected benefit obligation is then calculated by summing discounted value of each year expected pay out using discount rate of 8.00% p.a.

For calculation of expected payout it is assumed that death or withdrawal of an employee will happen at the start of each year.

From Illustration 2, we can clearly see that the expected payout for the first two years is low as the member has not vested the benefit and so the expected payout is only due to the eventuality of death. Increase in expected payoutfrom 3rd year onwards is predominately due to expected payout on account of attrition, as the member may vest thebenefit by that age. Increase in attrition rate for non-vested beneficiaries will decrease projected benefit obligation due to less possibility of getting the benefit.

Conclusion

The selection of actuarial assumptions is critical for determining employee benefit liabilities as in turn it determines the company's expense. Choice of appropriate assumptions will help in minimizing volatility in the expenses and liability.

Accounting standard on employee benefits prescribes management's responsibility to set assumptions, but it is the onus of the auditor to express an opinion on annual accounts which should reflect a true and fair view. Therefore they also play a major role in setting assumptions. We therefore recommend that a discussion between the Company (Finance and HR representatives), the Actuary and the Auditor should occur at an early stage in the valuation process. This ensures all stakeholders are in agreement in this key area.

It should be remembered that since the assumptions arelong term in nature (other than discount rate which isdriven by market yields); we would not expectsignificant changes in the assumptions year on year.Change should only occur where previous assumptionsare not reflecting experience or there has been achange in the management's perception for company'sfuture plans.

In setting the assumption for attrition rate, one musttake care that the past may not be always a guide to thefuture. Even if the past experience can be statisticallyanalyzed to produce some meaningful rates, the futureexperience of withdrawals will depend on generaleconomic conditions as also the particular conditionsaffecting the given employer's business. Furthermore,withdrawal rates differ significantly from scheme toscheme and within a scheme from year to year.