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Turnover Rates and Retirement Plan Cost

Analysis of turnover rate assumption in actuarial valuations of post-employment benefits.

1) In your opinion, what is the primary cause why employees are leaving a company?

The answer most of the time is arguably resignations, not retirement, death or disability. This is supported by the fact that employees nowadays are more mobile than their counterparts a generation ago.

If this is the case for your company, then turnover rates is a highly critical assumption in actuarial valuations.

2) In your experience, is it fair to assume that all employees even twenty year olds will surely stay with the company until retirement,     barring death and disability?

Assuming a turnover rate of nil or equivalently not using turnover rates is EQUIVALENT to saying that all employees regardless of age and seniority will SURELY stay with the company, barring death and disability.

3) What is the impact if an actuarial valuation uses a turnover rate of nil when in fact your company experiences resignations as the     number one cause employee turnover?

The liability and expense computed with the appropriate turnover rates assumption is generally smaller than those calculated with turnover rates set to nil.

Consider the following example
Employee One employee – age 30 with 5 service years
Retirement plan RA 7641 (minimum retirement benefit)
Discount rate 7%
Salary increase rate 5%
Turnover rate 5% for first five years,
3% thereafter

The resulting normal cost is 91% lower than if no turnover rate is used. This example, clearly illustrates that the appropriate turnover rates need to be used.

Note: The effect of turnover rates on the actuarial values depends on benefit structure, demographics, and actuarial assumptions.

4)What does PAS 19 say about turnover for actuarial valuations?

Paragraph 50 states:
“Accounting by an entity for defined benefit plans involves the following steps:
(a) using 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 entity to determine how much benefit is attributable to the current and prior periods (see paragraphs 67–71) and to make estimates (actuarial assumptions) about demographic variables (such as employee turnover and mortality) and financial variables (such as future increases in salaries and medical costs) that will influence the cost of the benefit (see paragraphs 72–91);”

Therefore, PAS19 requires an appropriate assumption for turnover rates.

In summary, appropriate turnover rates should be used in actuarial calculations because these rates significantly affect actuarial results. That is why at KAI, we specialize in customizing this assumption relative to your unique actual experience.