Retirement costs for public sector banks is gradually dissipating as the ratio of employees who are in defined contribution is 60% today as compared to 10% in FY11
The year FY2019 saw the gap between retirement assets and liabilities remain at similar levels as in recent years. Retirement costs contribute to 17% of the overall staff costs. Present value of future liabilities have increased by the slowest pace at 5% year-on-year (y-o-y), employee payouts have increased 20% (y-o-y) and share of active employees who are part of defined benefits continues to decline suggesting that the issue of retirement costs for public banks is gradually dissipating.
Broad trends unchanged on retirement liabilities
FY2019 saw the gap between pension assets and liabilities remain similar to that of previous few years as the gap has been largely funded. There’s likely to be some degree of mismatch as there is a timing difference between contribution and P&L charge. The contribution to the scheme was 70% of the P&L impact as compared to 150% in FY2017. Operating expenses remain at elevated levels with retirement costs 17% of the total staff costs for the bank. Gratuity is a lesser concern as its cost is only 2-5% of the reported staff cost.
Lower increase in actuarial losses
The overall actuarial losses were quite low in FY2018. On the liabilities side, banks have maintained their long term interest rate. However, the recent decline in interest rates implies a higher share of contribution from the employer. Banks have reported a net loss which could imply some revaluation of liabilities. However, once plans reach full maturity, this would start to reverse. The increase in liabilities could also be on account of long-term life expectancy. One key observation to note would be the comments made by BoB post acquisition of Dena and Vijaya Bank. It remains to be seen if the variables that are reported to us and the actual costs are hugely different across banks.
Employee mix is changing
As we have been highlighting in the past few years, the employee mix is positive for public banks. Given the extent of disclosures and variability of changes to many variables on the defined benefit obligation, we think that it is very hard to get accurate data from the available data. However, we indirectly look at the various disclosures: (1) share of benefits paid in the overall fund (2) share of interest costs to current service costs and (3) move to switch to defined contribution from defined benefits for new employees. At this point, we are seeing strong signs of this showing a possible mature plan.
Employees in defined contribution may have crossed 60%
There is evidence that the ratio of employees who are in defined contribution to total employees is 60% today as compared to less than 10% in FY2011—a function of new hiring. On the other hand, we think the ratio of active employees to those who have retired is likely to reverse in the next few years. Our discussion with banks indicates that active employees in the defined benefit scheme have declined to less than 40% levels from 65-70% levels in FY2011. This will also result in keeping the average cost/employee at closer to current levels. We do expect quite a few public banks to report single digit growth in average staff costs in the short term.
Edited extracts from Kotak Institutional Equities Research