Introduction

In today’s ever changing circumstances, every organisation aims to achieve long term financial stability. This can be achieved by actuarial valuation conducted by them which supports companies by assessing their long-term obligations. Thus, actuarial valuation is the process which facilitates companies in evaluating its future liabilities to be paid in the form of employee benefit schemes. We will understand actuarial valuation and how it supports the company in the financial stability in the long term in detail.

What is Actuarial Valuation?

Actuarial valuation refers to estimating the present value of future obligations to be paid as a part of employee benefit schemes provided by the company. Companies provide various benefits to its employees for their services rendered over the years. These benefits need to be calculated in monetary terms so that the company gets an idea about the funds required by them in the future and they can then make appropriate provisions for it. These are made through evaluating actuarial valuation which is done by actuaries. They analyse the data and forecast future trends with the help of various statistical models and techniques. This helps the company in making better and informed decisions and thus helps in better future financial planning.

Role of Actuarial Valuation in supporting Financial Stability of the Company

Actuarial valuation helps the company to determine its financial health so that they get prepared about any future financial challenges they may face in the future.

1. Risk Management:

   Actuarial valuation helps the company to determine various potential risks and evaluate them in monetary terms. This makes the company capable of assessing them and making strategic plans to mitigate those risks. Thus, actuarial valuation helps in managing risks and brings financial stability in the long run. For example, changes in the economic or business environment impacting the pension schemes is overlooked by actuarial valuation, helping the company to make specific and accorded plans for the future.



2. Financial Planning in the long run:

   Actuarial valuation determines the funds required by the company in the long term by evaluating its future liabilities in the form of employee benefits like pension, gratuity, long service awards, etc. provided to the employees by the employers of the organisation after or near their retirement. This helps businesses to understand their finances better so that they can ensure that required funds estimated for the future are neither overestimated nor underestimated. For instance,

   • Companies can perform sensitivity analysis or scenario analysis to understand how changes in the actuarial assumptions affect the future liabilities of the company, thus improving the efficiency of handling of finances.
   • Based on the estimated liabilities in the form of employee benefit schemes, companies can set aside the funds that would be required in the future for better financial planning.
   • With better understanding of the expected returns on investments, the company can make better and informed decisions about its funding strategies, thus enabling improved long term financial planning.


3. Cost Management:

   Managing the costs in an effective and efficient way is crucial for any organisation, actuarial valuation is one of the ways to achieve this. It helps the company to understand their cost structures with respect to the employee benefit plans, enabling them to allocate resources in a better way and make informed decisions improving the profitability of the business. Thus, actuarial valuation helps the company to manage its long-term costs, enabling financial stability.



4. Improved Decision Making:

   Actuarial valuation helps the organisation evaluating different scenarios based on the actuarial assumptions estimated before and then choosing the best course of action ideal for the finances of the company. Thus, actuarial valuation facilitates the firm in making informed decisions about the company and maintaining financial stability.



5. Complying with the Regulations:

   Companies need to comply with the financial regulations set by the government to stay away from legal matters and enhance its business reputation in front of the world. Actuarial valuation, thus, not only helps the company in estimating its future liabilities but it also helps the firms in compliance with the regulations, hence maintaining stability in the long run.



6. Maintaining better financial reports:

   Financial reports made by the company truly reflect its financial situation which is necessary to be maintained as stakeholders of the company rely on these majorly for knowing its position in monetary terms. Actuarial valuation helps the company to better evaluate the assets and liabilities of the company, and hence its financial statements which ensures transparency between the company and its associates.



7. Increasing the confidence of investors:

   Actuarial valuation is the process through which the company and hence its stakeholders including its shareholders, management, investors, etc. get a clear idea about the financial position of the company. This makes the investors aware regarding whether the business is profitable or hence investable or not, and hence increases their confidence if the company’s finances depict strong financial planning. The transparency created by actuarial valuation report encourages investors to invest in the business and hence expand it, profiting the company.



8. Supporting mergers and acquisitions:

   Actuarial valuation provides the financial analysis of the company which is crucial for mergers and acquisitions. In case of M&A, other companies are required to know about the financial situation of the company, its assets and future liabilities, which is provided by actuarial valuation report. Thus, this facilitates firms in making long term decisions and hence financial stability is maintained.

Conclusion

Actuarial valuation acts as a major tool in supporting the long-term financial stability of the company. By accurately predicting the future liabilities of the company in the form of employee benefit plans, businesses get a clear idea about their long-term financial situation which facilitates them in making better and informed financial decisions. Apart from this, actuarial valuation also helps organisations compliance with regulations, enhanced investor confidence, effective cost management, better management of potential risks, etc. all of which helps in improved long-term financial stability.

Frequently Asked Questions