G-Sec Interest Rates for December and Consequent Impact on Actuarial Valuations

As per Para 83 of IND AS 19/IAS 19 (Revised) & Para 78 of AS 15 (Revised), the rate used to discount post-employment benefit obligations (both funded and unfunded) should be determined by reference to market yields at the balance sheet date on government bonds.

The discount rate is a key assumption used in the Actuarial valuation of employee benefit liabilities. Actuarial valuation primarily finds the Present value of the liabilities (or benefits), that are expected to be paid in the future. For this purpose, it is vital to use the appropriate discount rate. The various accounting standards have prescribed, for the purpose of Employee Benefit valuations, the basis for choosing the discount rate. It states that an entity should use the government bond yields (or corporate bond yields, where applicable) for a term that is equivalent to the maturity term of the liabilities. Because of the aforesaid Guidance, the year-on-year movement in the discount rate is reflected in the year-on-year fluctuations in the Company’s Profit and Loss and Balance sheet. 

: G-Sec Interest Rates for December and Consequent Impact on Actuarial Valuation
G-Sec Interest Rates chart for December and Consequent Impact on Actuarial Valuations dec-vs-march

Key Observations: 9 monthly reviews

  • The bond yields for durations of less than 7 years have shown a substantial upsurge, with yields increasing between 60 basis points to 225 basis points in a 9-month period

  •  An average increase of 20 basis to 50 basis points in observed for maturity periods of over 9 years

Entities could expect liabilities to reduce by 5% because of interest rate increase (assuming a 10-year term of obligation and a 50 basis points increase in interest rates)

G-Sec Interest Rates chart for December and Consequent Impact on Actuarial Valuations

Key Observations: 12 monthly reviews

  • The bond yields for durations of less than 13 years have shown a substantial upsurge, with yields increasing between 90 basis points to 238 basis points in a 12-month period

  •  An average increase of 59 basis to 43 basis points in observed for maturity periods of over 13 years

Entities could expect liabilities to reduce by 8.8% because of interest rate increase (assuming a 10-year term of obligation and a 88 basis points increase in interest rates)

comparison of yields chart - dec-vs-sept 2022

Key Observations: 3 monthly reviews

  • The rates are fairly consistent with a modest hike of around 5 to 10 basis points in a 3-month period

Entities could expect liabilities to reduce by 1% because of interest rate increase (assuming a 10-year term of obligation and a 10 basis points increase in interest rates)

As per Para 83 of IND AS 19/IAS 19 (Revised) & Para 78 of AS 15 (Revised), the rate used to discount post-employment benefit obligations (both funded and unfunded) should be determined by reference to market yields at the balance sheet date on government bonds.

The discount rate is a key assumption used in the Actuarial valuation of employee benefit liabilities. Actuarial valuation primarily finds the Present value of the liabilities (or benefits), that are expected to be paid in the future. For this purpose, it is vital to use the appropriate discount rate. The various accounting standards have prescribed, for the purpose of Employee Benefit valuations, the basis for choosing the discount rate. It states that an entity should use the government bond yields (or corporate bond yields, where applicable) for a term that is equivalent to the maturity term of the liabilities. Because of the aforesaid Guidance, the year-on-year movement in the discount rate is reflected in the year-on-year fluctuations in the Company’s Profit and Loss and Balance sheet. 

: G-Sec Interest Rates for December and Consequent Impact on Actuarial Valuation
G-Sec Interest Rates chart for December and Consequent Impact on Actuarial Valuations dec-vs-march

Key Observations: 9 monthly reviews

  • The bond yields for durations of less than 7 years have shown a substantial upsurge, with yields increasing between 60 basis points to 225 basis points in a 9-month period

  •  An average increase of 20 basis to 50 basis points in observed for maturity periods of over 9 years

Entities could expect liabilities to reduce by 5% because of interest rate increase (assuming a 10-year term of obligation and a 50 basis points increase in interest rates)

G-Sec Interest Rates chart for December and Consequent Impact on Actuarial Valuations

Key Observations: 12 monthly reviews

  • The bond yields for durations of less than 13 years have shown a substantial upsurge, with yields increasing between 90 basis points to 238 basis points in a 12-month period

  •  An average increase of 59 basis to 43 basis points in observed for maturity periods of over 13 years

Entities could expect liabilities to reduce by 8.8% because of interest rate increase (assuming a 10-year term of obligation and a 88 basis points increase in interest rates)

comparison of yields chart - dec-vs-sept 2022

Key Observations: 3 monthly reviews

  • The rates are fairly consistent with a modest hike of around 5 to 10 basis points in a 3-month period

Entities could expect liabilities to reduce by 1% because of interest rate increase (assuming a 10-year term of obligation and a 10 basis points increase in interest rates)

jenil shah - partner actuary - kapadia global Actuaries

Mr. jenil Shah,
Consulting Actuary
jenil@kapadiaglobal.com
+91-9867075522

Anil Sevak -director-kapadia global Actuaries

Mr. Anil Sevak,
Head: Employee Benefits
anil@kapadiaglobal.com
+91-8454066628