The liabilities of public sector banks have increased the combined estimated liabilities for employee benefits of the BSE100 companies by 24 per cent to Rs 3,600 billion compared to Rs 2,900 billion in the previous year, according to a study. The liabilities are now reflecting the impact of wage revisions and the second pension option.

This result was highlighted in a study – “Employee Benefits Accounting and Risk study” – by Towers Watson, a leading global professional services company. The annual report was an analysis of the financial statements of the BSE100 companies as on March 31, 2012.  

According to the report, the unfunded employee benefit liabilities have decreased from 32 per cent to 14 per cent in a span of five years. Further, the overall funding of the total defined benefit liabilities has increased from 80 per cent in 2011 to 86 per cent in 2012, a company press release said.

While there has been an increase in the overall funding, a closer look at the broad risks faced by companies indicate that public sector banks continue to face higher business costs and liabilities risks as compared to other sectors largely due to the Defined Benefit Pension liability, the press release said.

The median employee benefits expense on account of benefit liabilities as a percentage of operating profit is almost 25 per cent amongst PSU banks as compared to private banks where it is 0.5 per cent and 1 per cent for the BSE100 overall. Apart from PSU banks, the energy sector is also grappling with significant risks in terms of employee benefit liabilities while other sectors appear to fare better.

Commenting on the study findings, Kulin Patel, Director - Client Account Management, Towers Watson India, said, “Against the backdrop of an uncertain and dynamic macro-economic environment, Indian companies are increasingly becoming cautious and conscious about financial facets of employee benefits. Unfunded Defined Benefits liabilities have seen a marked decrease over the last five years. This is further validated by the fact that corporate liability for long term employee benefits is now better funded. With greater clarity and a better understanding around the valuation of employee benefits, coupled with increased scrutiny by auditors, we are seeing more Indian companies disclosing liabilities for benefits plans that may not have been explicitly mentioned previously, like long-term medical plans and long service awards.”  

Drawing attention towards DB, the study brings to the fore how DB pension continues to be the biggest contributor to total liabilities at 52 per cent (58 per cent in 2011), followed by gratuity which contributes 23 per cent (26 per cent in 2011). Interestingly, the survey reveals that if PSU banks are excluded ‘Other’ defined plans and gratuity emerge as the biggest contributors at 42 per cent and 33 per cent respectively. Increase in ‘Other’ DB liabilities over the past year can be attributed to greater disclosures by companies and particularly provident fund trusts.

Patel said, “We will be looking with significant interest at March 2013 results in the coming months as indications are that companies have been grappling with an increase in liabilities due to a potential 50 basis fall in the interest rates used to value the liabilities in the most recent financial year, as compared to 2012.”

Funding level has increased by 5 per cent for gratuity plans and decreased by 7 per cent for DB pension liabilities, while combined overall funding of the total DB liabilities has increased from 80 per cent in 2011 to 86 per cent in 2012.

As compared to 2011, there is a rise in the percentage of plans which are backed by assets; gratuity plan retaining the top position with 81 per cent of such plans. This can be ascribed to increased contributions into funds backing the liabilities with 2012 contribution levels being twice that of “service costs”.