- Required under IAS 19, it estimates future employee benefits and discounts them to present value.
Valuation Using Projected Unit Credit Method
The Projected Unit Credit (PUC) method is widely used for measuring the actuarial liabilities for defined benefit plans. Here are the key procedures involved in executing a valuation using this method:
- Identify the Benefits: Determine the type of benefits to be valued, including retirement pensions, health benefits, and any other post-employment benefits.
- Gather Data: Collect relevant data on employees, including age, salary, service length, and demographic factors. Historical data may also be necessary for accurate assumptions.
- Determine Actuarial Assumptions: Establish key assumptions that will impact the valuation, such as:
- Discount rates
- Salary growth rates
- Mortality rates
- Employee turnover rates
- Calculate Projected Benefits: For each employee, calculate the projected benefits at retirement using the established assumptions. This typically involves projecting salary increases and computing the benefit entitlement based on these projections.
- Determine Service Cost: Calculate the current service cost, which represents the present value of benefits earned by employees in the current period.
- Compute Past Service Cost: Assess any past service costs that arise from modifications to the plan benefits or from changes in actuarial assumptions that result in additional liabilities.
- Calculate Total Obligation: Sum the present value of future benefits owed to employees for both current and past service to arrive at the total actuarial liability.
- Perform a Sensitivity Analysis: Analyze how changes in key assumptions (like discount rates and salary growth) impact the valuation results. This helps in understanding the potential variability in the actuarial liability.
- Compile Reporting Results: Document the findings in a clear and concise report. This should include methodology, assumptions used, calculations, and the final results of the valuation.
- Review and Update: Regularly update the assumptions and recalibrate the valuation as necessary to reflect changes in the workforce, market conditions, or regulatory requirements.