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BSE 100 companies don't have the ability to fund 20 per cent of their employee benefit liabilities, says a study by Towers Watson, a professional services firm. The survey, which is based on disclosures in the latest Annual Reports (2011) of these companies, says that this figure is higher than the 14 per cent funding gap noticed in the previous year. The unfunded employee benefit liabilities have more than doubled to Rs 58,000 crore as on March 31, 2011 as against Rs 28,000 crore as on March 31, 2010.
The liability for employee benefits in India includes gratuity and provident fund, which are mandatory. This apart, companies also provide long-term benefits in the form of Defined Benefit schemes (pension, leave benefits, death, disability and post retirement medical needs) and Defined Contribution schemes (superannuation).
The gap has widened because, while liabilities have increased significantly in the last one year, there has not been a commensurate increase in assets. For example, the Defined Benefit liabilities of 83 companies common between the 2011 and 2010 study, stood at Rs 1,32,000 crore as on March 31, 2011 (approximately 50 per cent higher than previous year). But assets stood at only Rs 77,200 core (27 per cent rise over the previous year).
Sector trends
Consistent with the previous years, the banking sector continues to have the largest benefit plans. The liabilities for the BSE 100 banks have increased almost two-fold to Rs 10,500 crore as on March 31, 2011. This could be due to the liabilities fully reflecting the impact of wage revisions and employees taking advantage of the second pension option. While the oil and gas sector comes a distant second with Rs 1,884 crore in unfunded liabilities, average liabilities for other sectors such as IT, Telecom, Power and Mining have remained around the same levels for the last three years.
Implications
The significance of such increase in liabilities is that it has a direct impact on the profits, as accounting standards require immediate recognition of change in liability measurements. The survey points out that an increase in liabilities could also be because of improved disclosures by companies. Companies need to make the projecting of these liabilities part of their business planning and ensure adequate back up for their assumptions. This will help reduce the volatility in benefits expense, it adds.
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