ACTUARIAL VALUATION OF EARNED GRATUITY FROM RETROSPECTIVE APPROACH: THE BASIS FOR MORTALITY EXCLUSION

Abstract

Actuarial valuation report on already earned gratuity of a Pharmaceutical firm operating defined benefit scheme was reviewed. Various assumptions leading to the valuation result were also considered. An assumption not critical in this valuation schedule is mortality. The study argues that the inclusion of mortality in the actuarial assumptions would be inappropriate since the payment of gratuity in respect of qualified plan members is not contingent upon their survival since the affected plan members have already survived. The study further argues that only future payments such as pension which is contingent on survival would require mortality. Hence, the inclusion of mortality on already earned gratuities lead to a sharp reduction in the expected members’ gratuities thereby resulting in erosion of gratuity funds while they are still active at work. From the sourced data, there was no evidence of any funds set aside to meet the gratuity due. In the computation of gratuity exercise carried out in this study, mortality assumption was excluded to get the actual value of scheme. The results revealed that employees with accrued gratuities of N2,800,645.82 have not served up to 5 years qualifying rule in the current employment. The Actuarial liability as 31st December, 2017 was N14,015,439.63. The study recommended that management should ensure that funds are set aside to pay the gratuity of retiring employees and the investment must not bring about adverse effect to employees’ gratuities.