2011 Survey of Financial Assumptions for Valuations of Defined Benefit Schemes in accordance with Hong Kong Accounting Standard 19 – Employee Benefits (HKAS 19)

Since the introduction of HKAS 19, Towers Watson has been surveying the financial parameters used by employers in complying with the requirements of HKAS 19 for their defined benefit retirement schemes.  The Towers Watson 2010/2011 Report (the eighth in this survey series) is now available.  It covers companies with accounting years ended within the survey period of 1 July 2010 and 30 June 2011.  98 defined benefit schemes with around 55,000 members are included in the survey with total net asset values of HK$41 billion.

This report covers the following areas in the context of HKAS 19:

• Companies’ selection of financial assumptions;
• Market practice for treatment of actuarial gains and losses; and
• Impact of HKAS 19 to Profit or Loss Account and Balance Sheet.

Highlights

• Median discount rate has increased but salary growth rate remains stable
  The median discount rate adopted has increased from 2.60% p.a. for 2009/2010 to 2.90% p.a. for 2010/2011 resulting in lower liabilities.  On the other hand, 2010/2011’s median assumption for long term salary increases has remained unchanged at 4% p.a.
• Median expected return on assets has decreased
  The median expected return on assets adopted has decreased from 7.0% p.a. for 2009/2010 to 6.5% p.a. for 2010/2011 resulting in higher Annual Expense in isolation.
• Good investment performance in 2010/2011 led to an increase in surplus
  Schemes’ asset values have increased due to good investment performance in 2010 (average return of 8.3%).  This led to an increase in the average Net Asset (i.e. surplus) on surveyed companies’ balance sheets from 1.9 times of the total monthly scheme salary last year to 2.2 times this year.
• Annual Expense for 2011/2012 is expected to decrease slightly
  The 2011/2012 Annual Expense is expected to decrease, mainly due to good investment performance over the year 2010/2011 which has in most cases given rise to an actuarial gain.  For those companies which recognize actuarial gains / losses through their Profit or Loss Accounts, this will come through as a reduction in expense for 2011/2012.
• IAS 19 Amendments
  On 17 June 2011, the International Accounting Standards Board (IASB) amended IAS 19.  The major amendments include:
  • All actuarial gains / losses to be recognized in Other Comprehensive Income in the year they arise.
  • The expected return on scheme assets assumption to be replaced by discount rate.
  The amendments will be effective from 1 January 2013.  Appendix F sets out the major amendments.
• Changes to the Tax Treatment
  In July 2011, the Hong Kong Inland Revenue Department (IRD) announced changes to employers’ tax deductibility in respect of defined benefit schemes in Hong Kong. Effective immediately, the ordinary annual cash contribution subject to certain limits, instead of the charge to Profit or Loss Account under HKAS 19, is treated as tax deductible.  Towers Watson’s bulletin covering key issues of this change is included in Appendix G.

Please click to read the Survey in full.