Format of Actuarial Valuation Report

Introduction

An actuarial report provides important financial information to help organizations manage their financing strategies and fulfil legal reporting requirements. This blog tells about the standard format of the Actuarial Valuation Report and includes tables, appendices, and specific analyses required for organizations to complete their financial disclosures.

Report Format 

The valuation report provides a well-defined presentation of results which ensures transparency.The format typically includes the following subsections: 

• Data: Data forms the core of any actuarial valuation. If the data is accurate then it ensures the trustworthiness as well as avoids costs of errors. The report includes:

• Member Data: Information such as age, gender, length of service, and salary details is critical to calculating future liabilities. 
• Historical Data: By providing past trends, such as contribution levels and benefit payments, this section establishes context and continuity in the valuation process.

• Assumptions: This forms the base for projecting the future cash flows of any organisation. Documenting assumptions provides transparency and allows stakeholders to understand how changes in market or demographic conditions could affect liabilities and costs.

• Certifications: The certification ensures the credibility and compliance of the valuation with relevant actuarial standards and accounting frameworks. The report includes: 

• A declaration of compliance with standards such as IAS 19, AS 15, or FASB ASC 715. 
• A statement affirming the actuary's independence and qualifications. 
• Confirmation that the data and assumptions are reasonable and appropriate. 

Result Summary

The summary of results provides a high-level picture of the main conclusions of the actuarial liability assessment which is tailored to facilitate the understanding of stakeholders, auditors and senior management. This section summarizes the results to ensure clarity while maintaining the depth needed to make informed decisions.

1. Member Data: The result summary section has information of member data.

This section included details of total members, categorized into active, deferred, and retired. Average age, years of service, and benefits accrued. The result summary helps stakeholders understand the profile and scale of the scheme's obligations. 

2. Financial Statements Extract : This section contains the details of asset compared with liability & resultant surplus /(deficit).

This section compares the actuarial liability with the fair value of assets leading to any surplus/deficit. These values are integral to corporate financial reporting and ensure compliance with disclosure requirements under accounting standards.

Scheme Details and Valuation Method

Understanding the specifics of the scheme and the methodology used is crucial for interpreting the results and ensuring alignment with the plan's objectives is covered under this section.

A brief description of the type of the plan (e.g. gratuity, whole life etc.), eligibility criteria and conditions for benefit entitlement. Specific benefits provided under the scheme. It establishes the scope of the valuation, ensuring that the results align with the scheme's design and legal requirements. Methods like Projected Unit Credit (PUC) or Entry Age Normal (EAN) are typically used. These methods differ in how costs are allocated over an employee’s service period. Documenting the chosen method clarifies the approach and ensures consistency with past valuations or prescribed guidelines.

Actuarial Assumptions:

This section covers different assumptions used for the calculation actuarial valuation of gratuity.

This section delves into the assumptions used in greater detail, reflecting both external factors (economic environment) and internal scheme-specific conditions.

1. Economic Assumptions

Salary Escalation: Reflects future salary growth patterns.

Expected Return on Plan Assets: Based on asset allocation and historical performance.

2. Demographic Assumptions

Mortality Rates: Helps predict life expectancy and associated benefits.

Attrition Rates: Captures expected employee turnover.

Retirement Age: Reflects retirement trends among employees.

Assumptions drive the calculations of liabilities and costs. Transparency here ensures stakeholders can understand and question the rationale behind these inputs.

Detailed Results

This section presents a comprehensive breakdown of the valuation findings.

a. Change in Present Value of Obligations: 

This section contains the walk of how the opening value of liability is changed during the period to arrive at the closing value of liability.

This section contains the Opening and closing value of actuarial liabilities. The liability change due to interest unwind on opening liability, benefit paid during the year which will reduce the liability. However, current service cost will increase the actuarial liabilities. 

b. Change in FV of Plan Assets

Similar to liability, this section contains the walk of assets from opening to closing. 

This section contains the Opening and closing value of assets. The asset value changes due to interest unwind on opening assets, benefits paid during the year which will reduce the assets. Assets will increase due to employee and employer contribution.

c. Expenses Recognized

This section covers the expenses which will be recognised in the income statement.

Thi section covers the change in the actuarial valuation of gratuity related to current service cost, past service cost, loss/(gain) on settlement. Actuarial gains or losses recognized in income statements or OCI.

d. Maturity Profile

This section covers the maturity profile of the gratuity liability.

Projects benefit payments over future periods. This analysis provides stakeholders with a detailed understanding of how liabilities and assets have evolved during the period and their expected trajectory.

Sensitivities in Actuarial Valuation

Sensitivity analysis is a critical component of actuarial valuations, highlighting how changes in key assumptions impact the valuation results.

This section provides stakeholders with a deeper understanding of the plan's exposure to risks and uncertainties, enabling better decision-making and financial planning. Common Sensitivities include:

• Discount rate variations.
• Salary escalation rate adjustments.
• Changes in mortality or attrition rates.

This analysis highlights the robustness of the results and potential risks associated with assumption changes.

Conclusion

The Actuarial Valuation Report is an useful and essential financial instrument which can help organisations in getting a true picture of their employee benefit liabilities. Key components such as Cost to P&L, Remeasurements in OCI, Net Liability on B/S, and Sensitivity Analysis provide stakeholders with an in-depth understanding of liabilities, risks, and future financial commitments. Tables like Reconciliation of Balance Sheet Liability and Changes in Assets and Liabilities offer a detailed view of movements over the reporting period. Appendices, including Employee Profiles, Key Assumptions, and Asset Distribution, provide supporting data and enhance the report's comprehensiveness.

Frequently Asked Questions 

1. What are remeasurements and where are these reported?
   Actuarial gains or losses due to changes in assumptions or actual experience reported in Other Comprehensive Income (OCI).
   
   
2. What is Net Liability?
   The difference between plan liabilities and plan assets.
   
   
3. How is sensitivity analysis helpful?
   It shows the impact of changes in assumptions on liabilities.
   
   
4. What are plan assets?
   Funds set aside to meet employee benefit obligations.
   
   
5. What is the role of assumptions?
   Assumptions project future liabilities and costs.
   
   
6. What is actuarial gain/loss?
   The difference between actual experience and assumed outcomes.
   
   
7. What is OCI?
   Other Comprehensive Income, where measurements are reported.
   
   
8. What are demographic assumptions?
   Assumptions about mortality, turnover, and retirement age.
   
   
9. What is reconciliation of liabilities?
   It tracks movements in plan liabilities over the year.