Part II OPERATIONAL AND FINANCIAL INFORMATION
21. EMPLOYEES’ HEALTH, WELFARE AND RETIREMENT FUND (a) Characteristics of the Defined Benefit Plan
The University maintains a tax-qualified, funded and contributory retirement plan, which is a defined contribution type of retirement plan since 1967, covering regular teaching and non-teaching personnel members.
The retirement fund is under the administration of an organization, the FEU Health, Welfare and Retirement Fund (the Fund), through its Retirement Board.
Contributions to this fund are in accordance with the defined contribution established by the Retirement Board which is the sum of the employees’ and the University’s contributions. Employees’ contribution is 5% of basic salary while the University’s contribution is equivalent to 20% of the employees’ basic salary.
Retirement expense presented as part of Employee benefits under Operating Expenses in the statements of profit or loss amounted to P82.6 million in both 2015 and 2014 and P81.3 million in 2013 (see Note 18).
As a policy of FEU, any contributions made by the University in the past years that were subsequently forfeited resulting from resignations of covered
employees prior to vesting of their retirement pay can be applied to reduce employer contributions in the succeeding years.
(b) Explanation of Amounts Disclosed in the Financial Statements
Actuarial valuation is obtained to determine the higher of the defined benefit obligation relating to the minimum guarantee and the obligation arising from the defined contribution plan. All amounts presented below are based on the actuarial valuation report obtained from an independent actuary in 2015 and 2014.
In determining the amounts of post-employment obligation in accordance with PAS 19 (Revised), Employee Benefits, the following significant actuarial
assumptions were used:
2015 2014
Discount rates 4.62% 4.68%
Expected rate of salary increase 5.00% 5.00%
Assumptions regarding future mortality experience are based on published statistics and mortality tables. The average remaining working lives of an individual retiring at the age of 65 is 15 for both males and females. These assumptions were developed by management with the assistance of an independent actuary. Discount factor is determined close to the end of the reporting period by reference to the interest rates of a zero coupon
government bonds with terms to maturity approximating to the terms of the post-employment obligation. Other assumptions are based on current actuarial benchmarks and management’s historical experience.
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As discussed in Note 2.15, the University’s defined contribution plan is
accounted for as a defined benefit plan with minimum guarantee starting in 2014 upon the University’s adoption of the PIC Interpretation on PAS 19 (Revised).
However, considering that the present value of the obligation as determined by an independent actuary approximates the fair value of the plan assets,
management opted not to recognize further the unfunded portion of the obligation which is considered insignificant as shown in the analysis below.
An analysis of the University’s defined benefit obligation following PIC Interpretation with respect to the defined benefit minimum guarantee under RA 7641 is presented below.
2015 2014
Present value of obligation P 723,808,781 P 688,252,191 Fair value of plan assets ( 720,281,160 ) ( 685,857,711 )
P 3,527,621 P 2,394,480 (c) Risks Associated with the Retirement Plan
The plan exposes the University to actuarial risks such as investment risk, interest rate risk, longevity risk and salary risk.
(i) Investment and Interest Risks
The present value of the defined benefit obligation is calculated using a discount rate determined by reference to market yields of government bonds.
Generally, a decrease in the interest rate of a reference government bonds will increase the plan obligation. However, this will be partially offset by an increase in the return on the plan’s investments in debt securities and if the return on plan asset falls below this rate, it will create a deficit in the plan.
Currently, the plan has relatively balanced investment in cash and cash equivalents, equity securities and debt securities. Due to the long-term nature of the plan obligation, a level of continuing equity investments is an
appropriate element of the University’s long-term strategy to manage the plan efficiently.
(ii) Longevity and Salary Risks
The present value of the defined benefit obligation is calculated by reference to the best estimate of the mortality of the plan participants both during and after their employment, and to their future salaries. Consequently, increases in the life expectancy and salary of the plan participants will result in an increase in the plan obligation.
(d) Other Information
The information on the sensitivity analysis for certain significant actuarial assumptions, the University’s asset-liability matching strategy, and the timing and uncertainty of future cash flows related to the retirement plan are described in the succeeding page.
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(i) Sensitivity Analysis
The following table summarizes the effects of changes in the significant actuarial assumptions used in the determination of the defined benefit obligation as of March 31, 2015 and 2014:
Impact on Post-employment Benefit Obligation
Increase/ Increase/
Change in (Decrease) in (Decrease) in Assumption Assumption Assumption
March 31, 2015
Discount rate +/- 0.5% (P 1,382,897 ) P 1,621,059 Salary growth rate +/- 1.0% 3,362,224 ( 2,234,521)
March 31, 2014
Discount rate +/- 0.5% (P 1,200,765 ) P 1,495,485 Salary growth rate +/- 1.0% 3,054,576 ( 1,993,447)
The sensitivity analysis is based on a change in an assumption while holding all other assumptions constant. This analysis may not be representative of the actual change in the defined benefit obligation as it is unlikely that the change in assumptions would occur in isolation of one another as some of the assumptions may be correlated. Furthermore, in presenting the above
sensitivity analysis, the present value of the defined benefit obligation has been calculated using the projected unit credit method at the end of the reporting period, which is the same as that applied in calculating the defined benefit obligation recognized in the statements of financial position.
The methods and types of assumptions used in preparing the sensitivity analysis did not change compared to the previous years.
(ii) Asset-liability Matching Strategies
To efficiently manage the retirement plan, the University through its Retirement Board, ensures that the investment positions are managed in accordance with its asset-liability matching strategy to achieve that long-term investments are in line with the obligations under the retirement scheme. This strategy aims to match the plan assets to the retirement obligations by investing in long-term fixed interest securities (i.e., government or corporate bonds) with maturities that match the benefit payments as they fall due and in the
appropriate currency. The University actively monitors how the duration and the expected yield of the investments are matching the expected cash outflows arising from the retirement obligations.
In view of this, investments are made in reasonably diversified portfolio, such that the failure of any single investment would not have a material impact on the overall level of assets.
A large portion of the Fund’s assets as of March 31, 2015 and 2014 consists of equities and debt securities, although the Fund also invests in cash equivalents.
The University believes that equities offer the best returns over the long term with an acceptable level of risk. The majority of equities are in a diversified portfolio of local blue chip entities but none are invested in the University’s listed shares with the PSE.
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There has been no change in the University’s strategies to manage its risks from previous periods.
(iii)Funding Arrangements and Expected Contributions
While there is no minimum funding requirement in the country, the size of the fund is also sufficient to cover the vested benefits when a significant number of employees are expected to retire in 20 years’ time.
The University expects to make contribution of P84.6 million to the plan during the next reporting period.
The Fund’s, which comprised of both employer and employee share
contributions, audited statements of financial position show the following as of December 31:
2014 2013 2012
Assets
Cash and cash equivalents P 131,849,098 P 148,504,605 P 454,037,795 Financial assets at FVTPL 831,437,782 740,760,974 419,496,563
Receivables 47,179,610 58,767,537 67,822,305
Others 72,892 71,897 55,093
1,010,539,382 948,105,013 941,411,756
Liabilities ( 25,086,630 ) ( 28,264,587 ) ( 19,092,789 )
Net Assets P 985,452,752 P 919,840,426 P 922,318,967
Below is further breakdown of the Fund’s financial assets at FVTPL as to type of investments as of March 31, 2015, 2014 and 2013. These are maintained in trust funds under credible trustee banks under control by the Fund through its Retirement Board.
2015 2014 2013
Cash and cash equivalents P 50,138,085 P 188,015,308 P 1,487,376 Domestic listed shares 191,763,058 163,793,630 23,310,000
Corporate bonds 189,820,368 119,144,077 99,047,757
Government bonds 148,334,870 84,265,726 31,525,196
Other securities and debt
instruments 107,072,969 115,972,897 129,179,983
UITF 24,556,039 - 14,611,383
Fixed income loans 4,839,695 5,996,959 26,055,918
Others 3,746,076 8,669,114 4,797,617
P 720,281,160 P 685,857,711 P 330,015,230 The above breakdown of the Fund’s financial assets at FVTPL is presented to show the composition of the plan assets used by the actuary in determining the net retirement obligation based on the minimum guarantee under RA 7641 as of March 31, 2015 and 2014.
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