INDIA: Corporates Brace Up To Face Pension Liabilities

NEW DELHI (The Economic Times), November 15, 2007: Pension liabilities, which corporate houses and banks have to provide for in their books from the end of this fiscal year, are set to vary widely for businesses depending on which sector they are in. Under the revised standards, business houses have two options — either take a one-time hit in the reserves or stagger the liabilities through the profit and loss account over five years. The pension liabilities of new economy firms could vary significantly from that of old economy companies as the high rate of job changes in the technology sector requires them to provide for pension liabilities of employees for shorter periods. However, the element of uncertainty and the cost of retaining employees could be different for them compared with other entities. Banks and insurance companies will also face greater pressure due to the capital adequacy requirements. “Future attrition rate and assumptions on salary escalation can have a significant impact on future pension liabilities of companies. This can introduce fluctuations in the provisioning requirements of companies,” Chris Mayes of Watson Wyatt Worldwide, a global financial and human capital consultant, told ET. Providing for liabilities, such as gratuity, are a function of the attrition rate. If attrition rate is higher, the company will need to provide for pension liabilities over a shorter period of time. For instance, even a 1% difference in salary assumption can lead to a 15% change in liability, accounting experts said. Actuarial assumptions need to be market-based and inflation indexed. For banks, the revised accounting standard for employee benefits is set to impose a huge burden. Their existing liability is estimated at a staggering Rs 26,000 crore. Because of certain new accounting methods the new standard necessitates, this liability is likely to go up by another Rs 14,000 crore, accounting experts said. Public sector banks employ a total of 2.55 lakh officers and 4.73 lakh clerical staff, who are under the existing system known as the defined benefit system. Over the past three years, on an average, about 12,000-13,000 people have joined public sector banks. By Priti Patnaik & Gireesh Chandra Prasad, TNN Copyright © 2007 Times Internet Limited.