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ctuarial Valuation of Post Retirement Medical Be

Schemes

Issues and Challenges (including impact of Ind AS 19

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Current Environment

Generally PRMB schemes are moreprevalent in the public sector than in theprivate sector

In the private sector:

A few legacy plans exist

In some cases, schemes have been closedto new entrants

About 30% of companies in the BSE Top

100 companies offer PRMB schemes

Liability amounting to about INR 14,000crores as at 31 March 2015 with P/Lcharge about INR 3,000 crores

Generally unfunded only 3 companiesin the BSE100 list have funded PRMB

schemes

Company

Oil & Natural Gas Corp Ltd Indian Oil Corp Ltd

Bharat Heavy Electricals Ltd

Tata Steel Ltd

Coal India Ltd

Steel Authority of India Ltd

NTPC LtdBharat Petroleum Corp Ltd

NHPC Ltd

Hindustan Petroleum Corp Ltd

Top 10 PRMB liabilities in Indi

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PRMB

Hospitalization

Own or Au

Hospitals (reim

of actual ex

Group Medicla

Insurance C

(annual

Domiciliary

Fixed annu

amount or reimof actual ex

Post Retirement Medical

Benefit

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PRMB - Typical Design:

Domiciliary Benefit

Medical expenses reimbursed in case the retired employees avail the out-patient services

including the medical cost whilst confined at home. This includes prescription drugs, dental,

vision etc.

Generally subject to an annual ceiling

Ceiling generally remains constant but may be reviewed from time to time

Some public sector companies have more g enerous schemes where coverage may not be restrict

annual maximum both in respect of hospitalization and dom iciliary benefits

Some com panies may also run their own hospitals where cover is either free of cost or heavily sub

Hospitalization Benefit

Medical expenses incurred due to care and treatment at a hospital

Coverage generally to retirees and spouse There is usually a limit on the total amount per annum. This is typically covered through a grou

mediclaim family floater policy from an insurance company

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Valuation methodology

Creates an obligation on the entity thus placing actuarial risk on the entity - Comaterial and measurable

Actuarial Cost Method : Projected Unit Credit Actuarial liability is calculated for active and retired employees

For retired employees:

Present value of expected future payouts

For active employees:

Present value of expected future payouts post-retirement:

Cost spread uniformly over employees service period:

Until such time when further service will lead to no material amount ofbenefits

Spread till eligibility age or normal retirement age

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Key assumptions

Financial:

Discount rate

Insurance Premium rate

Claims cost (including claim handling costs)

Medical inflation rate

Demographic:

Mortality (pre and post retirement)

Attrition

Early Retirement/ill health retirement/Disability

% married, spouse Age difference

Participation rate

Cap/Limit on benefit

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Basis for choosing financial assumptions

Financial assumptions should be based on market expectations for the period over whicobligation are to be settled.

Financial

Discount rate Market yield on government bonds that matches duration

(Corporate bonds under IND AS for foreign subsidiaries fwith deep market)

Duration can be longer than other lump sum schemes as

is payable till the retiree/beneficiary is alive

Premium rate

(Hospitalization Benefits)

Applicable for insured medical schemes:

Usually based on latest premiums paid by the compan

May need to be smoothed as sometimes premium rate

fluctuate due to change in insurance company or disco

Companies who report a high claim ratio also report a

premium charged by insurance companies. Due to this

need to monitor past claims ratio as this has a bearing

premiums in the future.

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Financial

Claims cost

(self-insured/authorized

hospitals/ own hospitals)

Applicable for self-insured medical schemes:

Detailed claims analysis (utilization and cost) based o

be required to determine claims cost

Need to collect data on past claims experience of a cas rates of other similar entities, which can be a majo

Average cost per day consists of 2 components (a) th

medical, drugs and surgical costs

Claims ageing study may be considered for large sch

Level and frequency of future claims - sensitive to ag

sex (self and dependents)

Medical inflation rate This is a very critical assumption which is often understacompanies

Future changes in the cost of medical services due to

advances

May need to assume different rates of inflation for roo

medical, drugs and surgical costs.

Medical, drugs and surgical costs would escalate at a

than room rate inflation

In the recent past, the cost of insurance cover has befaster than general inflation

Basis for choosing financial assumptions

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Basis for choosing demographic assumptions

Demographic

Mortality

Both pre retirement and post retirement mortality is us

Post retirement mortality is a significant assumption

Generally standard LIC table (96-98) annuitant mortali

for post retirement and IALM (2006-08) modified ultimamortality is used for pre retirement.

Increase in life expectancy due to various factors shou

incorporated in the mortality tables over a period of tim

can have significant impact on liability.

Attrition Another critical assumption as many schemes only offer

normal retirement, and therefore benefit vests only at 58

married and

Spouse age difference

Ideally obtain exact spouse date of birth often not reaavailable.

In the retiree medical benefit context, any assumption

dependent coverage can significantly influence the cos

plan.

Participation rate Important assumption for schemes that have optional me

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IND AS 19 impact

Overall, same impact as other Post Employment Defined Benefit Scheme

OCI impact

Actuarial gains and losses are to be recognized immediately through

Comprehensive Income (OCI) statement. This is expected to provide of stability to the P/L. Reasons for Gain/Loss - Can have significant actuarial gains and loss

assumptions are not in line with experience, especially claim cost andinflation. Therefore, assumption setting is key to minimize gains and lo

There may be more scrutiny of assumptions from auditors and othstakeholders since now Actuarial Gains and Losses will be appeaseparate item in OCI and will not flow directly through P/L

Net interest cost:

Interest cost and expected return on plan assets are replaced with neincome/cost on the net asset or liability recognized on the balance sheinterest income or cost is measured based on the plan's discount rate

Minimal impact as most schemes are unfunded

More clarity on assumption setting: Para 96. Assumptions about medical take account of estimated future changes in the cost of medical services, from both inflation and specific changes in medical costs.

Requirement of additional disclosures

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IND AS 19 impact additional disclosures

Explanation of plan characteristics and associated risks Unusual, company- and plan-specific risks Significant concentration of risksApproach to risk management

Amount, timing and uncertainty of future cash flows: Sensitivity analysis of significant assumptions For PRMB scheme, should generally include discount rate, medical inflation,

claimscosts, post-retirement mortality and attrition rates

Maturity profile of obligations: duration and / or cash flow

Other:

Split of liability into actives, deferred and retirees

Split of liability into vested and unvested

Split of actuarial gain/loss due to demographic and financial assumptions.

If scheme is funded, detailed disclosures relating to the fair value of assets includisaggregation of fair value of plan assets into asset classes based on nature an

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Summing up: Major issues and challenges

Assumption setting:

Like all valuations, assumption setting process is critical Liabilities highly sensitive to a number of assumptions, e.g. premium rate

costs, medical inflation, post retirement mortality, attrition

Medical inflation rates current being used in the industry may be on the land may not adequately build in factors like medical technology advancepremium increases in the long term

Medical costs increasing greater than inflation, making assumption for thdifficult

Improvement in longevity may not be appropriately allowed for in the val Using current premium rates can be misleading as sometimes this could

to change in insurance company and may not appropriately factor in clai

Claims data and analysis

More scientific approach required for studying past claims data and deteclaims costs and utilization, especially for schemes where benefit is unca

Reliable past claims data need to be available to enable such detailed a

Claims cost by age and due to medical inflation may need to be analyze

Data may need to be analyzed separately for claims in respect of in-servretired employees

Such data is often not available from employers:

Difficult to get data on the dependence of medical costs on age and

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Summing up: Major issues and challenges

Risks

Material risks given the nature of the benefit, e.g.

Longevity Risk the risk that pensioners may live longer than expec

Inflation Risk Healthcare cost increases are higher than assumed Investment Risk availability of the required cash flows, and an app

investment strategy to offset the impact of the liability

Operational Risk the risk that overpayments are made to the medicrespect of pensioners who have passed away, as well as the adminiburden and expenses incurred

Morbidity Risk actual experience different from assumed

Generally unfunded liabilities - have to bear brunt of volatile cost Liabilities can be significant and are expected to grow rapidly

Ind AS 19 Transition

Impact on OCI can be significant if assumptions not appropriate

Additional disclosure requirements, especially on risks associated and a

uncertainty of future cash flows