Other than Gratuity benefit, few other employee benefits are provided by the Companies, out of which Leave or Compensated Absences benefit is the most common. Different types of leaves include Privilege/Personal Leave, Annual Leave, Sick/Medical Leave, Casual Leave, paid time off (PTO), etc. Types and form of Leave benefit vary as per the industry norms. In our experience, there are various types of Leave Policies catered across industries.

Wherever Leaves are accumulated for more than a year, leave actuarial valuation is required for balance sheet provisioning purpose. In an actuarial valuation, future liabilities are estimated using assumptions, hence they form a very important part of any actuarial report.

We conducted a detailed study of Leave actuarial assumption patterns chosen by companies for the FY 21-22. Data of only FY 21-22 has been considered since almost all businesses were hit by the COVID 19 pandemic in FY 19-20 and 20-21. Many companies had changed their assumptions to suit the situation of the business, for example- many companies made salary increment rate for the next year equal to 0% while some revised assumption for next 1-3 years. Hence, these two financial years’ data has been left out of the study as they may be considered as anomalous years. The database used for the purpose of this study comprises of our various clients from all over India, the majority are from Maharashtra, Karnataka, Tamil Nadu, and Delhi. The sample size for the study was approximately 1,200 companies. We have also taken utmost care to exclude clients’ data with whom we have signed non-disclosure agreements.

Disclaimer: This study is built on the client database of Ranadey Professional Services Private Limited as at 31st March 2022. We don’t claim that the following results necessarily represent the trends in the industry. This report is proprietary information of Ranadey Professional Services. This is to be held strictly confidential and no part of the report should be reproduced or shared without the prior permission of Ranadey Professional Services.

Figure 1 depicts split of the database between major industry types. Almost 50% of the data is represented by manufacturing and IT industries. We have included few sectors like education, finance/banking, and hospitality under service category. Sectors like Media, Packaging, Jewellery, Retails stores etc. are included in others category.

Figure 1


a) Salary Increment & Withdrawal Rate Assumptions

Salary increment rate and Withdrawal/Attrition Rate assumptions are the main assumptions used for Leave actuarial valuation. Salary increment rate assumption is used to project the amount of the benefit payment and Attrition rate assumption is the expected employee turnover rate, and this
assumption is used to project when the benefit will be payable in the event of resignation.

We will cover detailed study on how to set these assumptions and industry-wise trend (for the sample size of 1800) in our next issue. In this article, we are focusing on additional assumptions and plan specifics required for Leave valuation.

b) Leave Availment Rate Assumption

Actuarial valuation is performed for the long-term type of leaves which are carried forward to next year. As per the guidelines provided by the accounting standard, for leave valuation two types of liabilities are calculated – 1) leave encashment liability and 2) leave availment/consumption liability. Leave availment liability is calculated using the assumption of leave availment rate.

Leave availment rate represents the per annum rate at which leaves are expected to be consumed in the future. It is estimated using yearly leave history provided by the Company. Employee-wise leave availment pattern is checked by considering leaves availed over and above the yearly leave accrual, from the opening leave balances. Assumption used for valuation can be set by considering past 2-3 years’ average leave availment pattern of the company. In leave valuation, availment rate is applied to the leave balances accumulated as on the valuation date.

For each long-term type of leaves (Privilege leave, Sick Leave etc.), leave availment rate assumption is considered separately based on the consumption pattern. It is mainly based on the Company’s experience and in cases where data is not available, it is based on industry experience. For our study, we have considered Privilege leave and Sick Leave, being the commonly applicable types of leave.

This leave availment rate methodology is for companies following ‘Last In First Out’ (LIFO) approach of leave utilisation. In LIFO method, it is assumed that whenever leaves are consumed by the employee, leaves that are earned by the employee towards the end, will be utilised first. There is one more method of leave utilisation known as ‘First In First Out’ (FIFO) method which assumes that the leaves earned first/initially by the employee are utilised first. Less than 1% companies from the sample data followed the FIFO method.

Figure 2 shows distribution of leave availment rate assumption used in Privilege Leave (PL) valuation for FY 21-22. As expected, leave availment rate is not very high as it represents rate at which leaves are availed over and above yearly accrual given to employee. Average PL availment rate was around 3% per annum.

Figure 2

Figure 3

Figure 3 depicts distribution of PL availment rate across industries. For Agro-based, Infra/Construction, Service and Other category, employees’ leave availment rate was less than 3%. It may be likely due to high active involvement required for the job in hand. Whereas in IT/Software industry employees were not availing excess leaves, either may be due to work from home or hybrid mode of work.

Figures 4 and 5 depict the average leave availment rate assumption used in Sick Leave (SL) valuation for FY 21-22 and its distribution across industries, respectively. Average SL availment rate was around 5% per annum. Figure 4 shows that Infra/Construction and Manufacturing industries had an average of more than 5%.

Figure 4

Figure 5

Figure 5 indicates that most of the companies had SL availment in the range of 3-5%, except for companies categorised as Others, where it was mainly less than 3%. Most of the times, Sick Leave of more than 3 days’ must be supplied with the medical certificate etc. In practice, annual accrual for Sick leave days is generally lower than accrual for Privilege leaves; also Sick Leaves are carried forward to the next year but generally gets lapsed at the time of exit. These are the main reasons for higher availment rate for Sick Leaves as compared to availment rate for Privilege Leaves.

2. Leave Plan Provisions specifics
Companies provide Privilege Leaves to their employees as per the Shops and Establishment Act or Factories Act, as applicable. Companies design leave policy document/employee handbook as per the industry trend and Management’s discretion. We request for the copy of leave policy and set the parameters for the valuation based on it. There are different parameters which are referred directly from the Company leave policy, to name a few-

  • Types of leaves offered to employees
  • Leaves accrued during the year
  • Whether leaves get accumulated or get lapsed
  • Whether leaves are encashable or non-encashable
  • Salary on which leave encashment is paid
  • Cap on leave accumulation
  • Cap on leave encashment
  • Divisor to arrive at the per day salary

Below are some scheme variations for Leave benefits from the database under study.
a) Divisor used in leave encashment benefit formula
It is the Divisor used to arrive at the per day salary while calculating leave encashment to be paid to employees at the time of exit or while in-service. While paying Leave encashment for unused Privilege/Earned leave balances, almost 64% companies arrive at the per day salary by using a divisor of 30 days, as seen in Figure 6. 20% companies used 26 days and 6% companies used 22 days as divisor. There were around 10% companies which used divisor to be same asthe number of days in the current month (30/31).

Figure 6

In Figure 7 industry wise practice of divisor used in leave encashment formula has been shown. Use of 22 days divisor was considerable in IT/Software industry where 5 days’ working week is followed. But 30 days is widely used across industries which lead to lower per day salary and hence benefit, as compared to amounts calculated with divisor of 22 days or 26 days.

Figure 7

b) Cap on accumulation for Privilege Leave
When employees are allowed to carry forward leaves to the next year, Companies also state in their leave policy what will be the maximum days allowed to be carried forward i.e., cap on leave accumulation. Such accumulated leave balances are encashed at the time of exit and serves as a lumpsum benefit in the hands of employee. Few companies also have a ‘no cap’ policy wherein employees can accumulate as many balances as they can. This serves as a tool to encourage employees to get maximum monetary benefit at the time of retirement/exit.

Figure 8 shows the distribution of cap on accumulation (in days) for Privilege Leave (PL), for the database under study. Around 38% of the companies allow employees to accumulate PL between 25 to 45 days, out of which around 17% of companies have flat 45 days of cap on leave accumulation. About 14% of the companies offer generous benefits to their employees by not capping the leaves.

Figure 8

In Figure 9, industry wise distribution of cap on PL accumulation policies of the companies have been shown for the purpose of providing more information to our readers. It shows that IT/Software and Pharma/Healthcare industries mainly prefer cap on PL between 25-45 days. In Agro-based industries 40% of the companies offered policy of no cap on PL.

Figure 9

c) Cap on accumulation for Sick Leave
Companies allow employees to accumulate Sick Leave balances which may be used in case of any medical conditions/illness. Various policies for SL are observed, most of the companies including PSUs allow employees to accumulate SL but any unused SL days lapse at the end. Some companies allow to encash accumulated SL balances at the time of exit whereas few companies specify events when SL may be encashed such as only at retirement or death.

As shown in figure 10, in case of Sick Leave, 19% companies have a ‘no cap’ policy wherein employees can accumulate as many balances as they can.

Figure 10

3. Funding of Leave plans
In case of Leave benefit, employees have an option of utilising leaves, so year on year there may be fluctuations in leave balance. So, most of the companies prefer to directly pay leave encashment amounts for exit cases. Also, there are no additional benefits to Companies by opting for a Leave fund as they would get with Gratuity trust fund e.g., tax deduction on contributions made to Gratuity trust. So very few companies choose to fund their leave benefit plan with the insurer mainly with the intention to secure employee benefits liabilities, in case of any liquidity risk or default risk.

In the database under consideration, only 1% of companies under consideration have funded leave schemes for FY 21-22, as shown in Figure 11.

Figure 11

4. Salaries used for Leave encashment and Leave availment
Where the accumulated Privilege/Earned leaves are encashed, the salary on which encashment is made differs according to the company policy. Study on average salaries used for valuation has also been done. It can be seen from Figure 12 that almost 60% of the companies pay leave encashment based on the Basic or Basic + DA. Around 30% companies pay leave encashment on Gross salary. Some companies pay encashment on CTC while a few do not encash accumulated Privilege/Earned leaves and any unused leaves get lapsed at the time of exit.

Figure 12

In this Study, we have excluded client’s data with whom we have signed non-disclosure agreements.

As mentioned above, leave availment rate is used to value leave availment/consumption liability and this liability is based on Cost to Company (CTC), as per ICAI guidelines. For this CTC with only fixed components is provided by the company. Sometimes leaves are allowed to be carried forward but are non-encashable type, such as Sick Leave. In these cases, actuarial valuation is carried out to value cost of expected future leave consumption from the current accumulated leave balance.

Figure 13 shows industry-wise average monthly CTC (with only fixed components) used for Leave valuation for FY 21-22, which has been used to calculate leave availment liability.

Figure 13

Companies must undertake regular assumption studies, once in around 3 years, to review actuarial assumptions and reset them based on this study along with their future expectations, not only to reduce volatility but also as a good governance policy.