Range of Employee Benefits Schemes (EOSB / Ex Gratia / LTIP)
One of our KSA investment banking clients wished to consider introducing a Long-term Incentive Plan (“LTIP”) for their C-Suite employees. We proposed carrying out a due diligence exercise to determine the potential future cost of such a Plan. The Bank approved the assignment which included computing the estimated service cost, interest cost and P&L charge over the financial years FY 2018-FY 2020 and conducting a sensitivity analysis to identify the impact of a +/-X% change in the actuarial assumptions on the potential cost of the Plan.
The scope-of-work was relatively complex due to the Plan design, for example, part of the computation involved determining the historical market growth rate of the Bank and its competitors in KSA, as any eligible award would need to be adjusted by a certain percentage rate, to reflect corporate performance.
The Bank, on the basis of the cost assessment exercise we conducted, later approved the LTIP and it has now been successfully implemented. Indeed, Lux conducted the first annual IAS 19 valuation of the Plan in early 2019 and it was found that the costs we estimated in the simulation valuation are being borne out in practice.
NB: The Bank also provides an Ex-Gratia Benefits Scheme to its long-serving employees based on a service-dependent multiple of salary, as well as the statutory EOSB Scheme. Lux provides the IAS 19 service for all three arrangements.
For one of our clients (a global drinks manufacturer with a local presence in Jordan), we were commissioned to conduct an IAS 19 valuation of their Jordanian EOSB Scheme.
At inception of the project, it was identified that the Scheme was integrated with the State Social Security Scheme, in that a percentage of the Company’s Social Security Contribution is considered as a contribution towards the EOSB Scheme, i.e. it is treated as an advance for the Scheme. Therefore, we needed to disclose the actual net EOSB payment made to the leavers during the valuation period and report on the amount of Social Security Contribution assigned to each leaver at the time of leaving, referred to as the “Social Security Contribution to the leavers reversed”.
The client did not fully understand the financial reporting implications of such a Scheme design and so there was an educational piece to this project, involving our lead Actuary providing bespoke training to the client’s Senior Management.
Skilled Project Management
For a major KSA conglomerate, comprising of twenty-seven entities, separate stand-alone reports were required. Some of the entities provided more than one scheme to their staff (e.g. a separate arrangement for Executives or a LTIP for long-serving employees). Liaison was required with HR/Finance representatives from each entity, ranging from Payroll Administrators and FMs to FDs and CFOs. Lux managed to provide all reports, on time, including required consolidations.
Publicly listed company
We were asked to implement an IAS19 valuation of End of Service benefits for a client.
This is usually a relatively straightforward exercise but for this client, being publicly listed, they needed to produce audited reports every quarter – and not just every year-end.
We adapted our usual IAS19 process and report, to give not just year-end results and annual cost for accrual of benefits, but rather actuarial liabilities at each quarter-end and also the actuarial cost for each quarter. This included projections for budgeting and reporting purposes for the year following the valuation date.
This allows our client to report accurate figures at each quarter-end, without the need for quarterly actuarial referrals.
Not Funded? Oh dear!
A client asked us to consider the End of Service Benefit liabilities they were required to disclose in their balance sheet, under IAS19. They had, to date, not accounted for any liability.
Considering their circumstances, employee demographic and the particulars of their scheme, we were able to establish what rate of basic salary was necessary as a contribution, to ensure that the entire liability would be funded to the balance sheet over a period of ten years.
They are not required to report their financials to any overseeing body, but we are happy to report that they are on their way to properly account for their costs and liabilities under IAS19.
Multi-Jurisdiction / Multiple Employee Benefits / Multiple Actuarial & Accounting Standards
One of our Foreign-owned clients asked us to perform an actuarial valuation of its End of Service benefits for four of its entities; UAE, KSA, Qatar and Pakistan. The company provides a different End of Service benefit scheme for each of its entities, so as to comply with the respective local labour law.
We reported our results in the local currency for each entity and also provided consolidated results by aggregating and converting into United Arab Emirates Dirham (AED). The client is now considering valuing its long-term savings plan.
For another client, we were appointed to value not only its End of Service Gratuities but also other long-term benefits, including Leave Encashment. The salary definition for each type of benefit was different, requiring us to collate multiple allowances and reconcile the various benefits paid against each set of scheme rules. This exercise identified a number of anomalies which resulted in an improvement in the quality of the client’s Payroll data.
Another Middle East client was asked by its Corporate Office in the US to report year-end financials under two different actuarial and accounting standards; US GAAP and Indian GAAP. Lux was commissioned to carry out the valuation work for its entities in Oman and Dubai for both End of Service Gratuities and Annual Leave Accrual. This effectively required us to conduct six separate valuations.
The client was under a great deal of pressure from the States to deliver the finalized reports within just a few days of the scope of work being clearly defined. Our team of actuaries worked relentlessly over a full week-end and, in their efforts, were able to deliver six comprehensive actuarial reports in just two days.