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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?
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?
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?
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?
“Accounting by an entity for defined benefit plans involves the following steps:
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.