Special Address Global Issues and Employee Benefits

1
Special AddressGlobal Issues andEmployee
Benefits

• Babloo Ramamurthy
• Managing Director, Watson
  Wyatt Europe
• ASSOCHAM International Seminar
• 7 March, 2006

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Watson Wyatt Worldwide
Watson Wyatt Worldwide

• With 125 years experience, Watson Wyatt combines
  human capital and financial expertise to deliver
  business solutions

• Listed on the NYSE in October 2000, ticker symbol
  WW

Watson Wyatt India

• In Asia-Pacific, Watson Wyatt is the largest firm
  of its kind with 800 associates in 12 countries
  and 18 offices

• We have been servicing clients in India since
  1996
• In 2001 we acquired MC Chakravarti Associates,
  India's largest actuarial firm

• Offices in Mumbai, Gurgaon, Kolkata, Bangalore

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Watson Wyatts global reach
6,000 associates in 90 offices serving clients in
32 countries
Asia Pacific Bangalore, India Bangkok,
Thailand Beijing, China Delhi, India Hong Kong,
China Jakarta, Indonesia Kolkata, India Kuala
Lumpur, Malaysia Manila, Philippines Manila
(DMC), Philippines Melbourne, Australia Mumbai,
India Seoul, Korea Shanghai, China Shenzhen,
China Singapore Sydney, Australia Taipei,
Taiwan Tokyo, Japan
Europe Amsterdam, Netherlands Budapest,
Hungary Birmingham, UK Bristol, UK Brussels.
Belgium Dublin, Ireland Düsseldorf,
Germany Edinburgh, UK Eindhoven,
Netherlands Leeds, UK Lisbon, Portugal London,
UK Madrid, Spain Manchester, UK Milan,
Italy Munich, Germany Nieuwegein,
Netherlands Paris, France Redhill, UK Reigate,
UK Rome, Italy Rotterdam, Netherlands Stockholm,
Sweden Welwyn, UK Zurich, Switzerland
United States Atlanta, GA Boston, MA Cincinnati,
OH Charlotte, NC Chicago, IL Cleveland,
OH Columbus, OH Dallas, TX Denver, CO Detroit,
MI Grand Rapids, MI Honolulu, HI Houston,
TX Irvine, CA Los Angeles, CA Memphis, TN Miami,
FL Minneapolis, MN New York, NY Pennsylvania,
PA Philadelphia, PA Phoenix, AZ Portland,
OR Rochelle Park, NJ
St. Louis, MO San Diego, CA San Francisco,
CA Santa Clara, CA Seattle, WA Stamford,
CT Teaneck, NJ Washington, DC
Canada Calgary Kitchener-Waterloo Montréal Toronto
Vancouver
Latin America Bogota, Columbia Buenos Aires,
Argentina Mexico City, Mexico Montevideo,
Uruguay São Paulo, Brazil San Juan, Puerto
Rico Santiago, Chile
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Watson Wyatts global market share for employee
benefits consulting
Watson Wyatt is actuary to the greatest share of
the 300 largest global pension funds with over
20 global market share.
ltActuarial Market Share for 300 Largest Pension
Funds Worldwidegt
NORTHAMERICA
COMPANY
GLOBAL
EUROPE
Watson Wyatt
21
20
32
Towers Perrin
10
12
8
Hewitt Associates
11
10
18
William M Mercer
9
9
10
5
Our clients in India

• Over 400 clients, including
• Tata Motors P G
• TISCO British Airways
• Steel Authority of India Ltd. (SAIL) Fidelity
• ICI India Exide Industries
• BOC India Pfizer
• Bata India Holcim/ACC
• Ingersoll-Rand Coal Mines Pension Fund

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Global Issues and the India Perspective
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What keeps CEOs awake at night?

• Globalisation
• New markets
• Offshoring
• Risk management
• Attracting / retaining top talent

Managing both financial and human capital
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Globalisation
Working age population (20 - 64) millions of
workers
2000 2010 2020
2030 China 770 877
914 900 India 519 645
765 854 Japan 79
75 68
65 Germany 51 50
48 43 United Kingdom 32
32 32
29 United States 167 186
197 198
Source United Nations, World Population
Prospects
China and India on every CEOs radar for
workforce planning
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Risk management

• Risk vs. return
• Corporate Governance
• New accounting standards
• Sarbanes Oxley

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Attracting / retaining top talent
Intrinsic
Job Role Professional challengeBusiness
contributionCommitment to OrganisationLevel of
responsibilityStimulating work
Personal Growth and learningCareer
opportunitiesSecurityRecognitionBusiness
relationships
Environment Social interactionQuality of
LifeGlobal reachCulture
Indirect
Direct
Compensation Base salaryVariableLong term
incentiveExpatriate pay
Benefits PensionsFlexible pay, Vacations,Cars,
Health Care, Medical Insurance, PHI,Life
Insurance, Training,Sabbatical
Extrinsic
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Why do employers provide benefits?
200 years ago
100 years ago
20 years ago

• Seeking to be employer of high standing
• Recognition of life-long service
• Associated with dangerous jobs (sailors,
  soldiers)

• Seeking to be employer of high standing
• Union demands
• Paternalism towards employees
• Emerging tax benefits

• Seeking to be employer of high standing
• Attraction retention
• Market competitiveness
• Statutory requirements
• Increased tax benefits

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Employee benefits the CEO view

• Globalisation
• As consistent as possible
• Risk management
• Assets vs. liabilities
• Attracting / retaining top talent
• An investment or a cost?

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Employee benefits the CFO view

• Employee benefits and corporate risk
• Cost (cash)
• Cost (accounting)
• Balance sheet impact
• Volatility

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The international experience
Average pension fund growth vs. liabilities 1990
2003
160
140
120
US
Growth of assets vs liabilities
100
80
UK
60
Japan
40
Jan-
Jan-
Jan-
Jan-
Jan-
Jan-
Jan-
Jan-
Jan-
Jan-
Jan-
Jan-
Jan-
Jan-
90
91
92
93
94
95
96
97
98
99
00
01
02
03
Sources Watson Wyatt, FTSE, MSCI, SP, Topix, vs
long bonds, average equity exposures through the
period
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The UK experience
Pension Liability over Market Cap. (mean)

General Industrials
Basic Industries
Utilities
2002
IT Telecoms
Other Cyclical Services
Consumer Goods
Retail
Financials
Resources
General Industrials
Basic Industries
Utilities
IT Telecoms
2003
Retail
Consumer Goods
Other Cyclical Services
Financials
Resources
0
.5
1
1.5
Source Watson Wyatt Pension Risk Database
Companies in the Industrials groups have pension
liabilities at or over 100 of market cap on
average
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UK experience (cont.)
Pension liabilities influence credit ratings and
are increasingly impacting MA
activity
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International Accounting Standards
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Accounting for employee benefits

• What is the cost of employee benefits ?
• earned today but paid in the future
• How to measure this cost
• Cash to employees ie benefit payments (in
  future)
• Contributions to a fund
• Actuary determines contributions
• Determines Companys cash flow
• Accounting principle of ongoing accrual
• Actuary determines Companys reported benefit
  cost
• Match emergence of cost to year in which service
  occurs

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Who wants to know?

• Equity investors
• Bond investors
• Financial analysts
• Rating agencies
• Authorities

Demanding comparability and consistency across
companies and across borders
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History of international employee benefits
accounting
IAS 19
IAS 19revised
IAS 19revised
IAS 19revised
2004
1966
1983
1987
1995
1998
2001
1988
1980
APB Opinion
FASB
FAS 87
SSAP 24
FRS 17
Key Drivers of International Accounting Standards

• Fair value accounting of benefits
• Greater consistency in treatment of
  liabilities/expenses
• Enable better comparability of benefit costs
• Provide adequate disclosure
• Recognize surplus/deficiency on Companys balance
  sheet

More prescriptive Less wriggle room
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The India perspective

• Globalisation
• International accounting
• Multinationals in India
• Overseas MA
• Risk management
• New AS 15 converges with IAS 19
• Corporate Governance
• Attracting/retaining top talent
• Worlds hottest labour market
• Stock based incentives
• Employee benefits within total compensation

Managing both financial and human capital
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Impact in India

• Gratuity and leave encashment
• Global compliance for multinationals
• New AS 15 compliance
• Potential adoption of IFRS 2 for stock plans
• Design benefits, stock, and incentives to manage
  attrition

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Contact information

• Liyaquat Khan, BSc FIA FASI
• Vice Chairman Chief Actuary, Watson Wyatt India
• liyaquat.khan_at_watsonwyatt.com
• Bob Charles, MA FIA FASI
• Head of Retirement Benefits, Asia-Pacific
• Managing Director, Hong Kong Office
• bob.charles_at_watsonwyatt.com
• Babloo Ramamurthy, BSc.
• Managing Director, Europe
• babloo.ramamurthy_at_watsonwyatt.com
• http//www.watsonwyatt.com