Participating fund: bonus declaration, estate support and Ind AS 117 transition

Test the declaration at three levels: total affordability, per-cohort equity, and the shareholder share.

• Affordability. Investment surplus this year is (8.6% − 7.25%) on roughly ₹8,400 crore attributed to the block, about ₹114 crore. Deduct an expense overrun of perhaps 25 basis points on the block (₹21 crore) and a mortality and lapse strain of about ₹10 crore, leaving roughly ₹80 crore of distributable investment surplus. The 4.20% reversionary adds ₹172 crore of sum assured per annum, so the declaration consumes more than the current surplus and relies on the estate and future returns.
• Cohort equity. The 2006 to 2010 cohort is in surplus and can support the declaration from its own asset share. The 2011 to 2015 cohort is 6.4% short. A uniform 4.20% for that cohort is only affordable by cross-subsidy from other cohorts or from the estate. Some smoothing is legitimate; a 6.4% structural shortfall from expense overruns is not, and the actuary should not sign it as if it were a temporary fluctuation.
• 90:10. Confirm the shareholder transfer does not exceed 10% of the surplus arising on the participating fund after the declared bonuses. If the proposed terminal bonus is cut, the surplus retained must accrue to policyholders, not leak to shareholders.

Recommendation. Maintain 4.20% for this year, since it is supportable on the stronger cohort and consistent with smoothing, but reduce the terminal bonus to no more than 0.5% and make it explicitly discretionary and reviewed annually. Use the estate deliberately to support the weaker cohort, and disclose the cross-subsidy and its expected unwinding in the actuarial report.

Quantify the buffer before arguing about the terminal bonus.

• Estate is roughly 3.3% of the fund (₹410 crore) on a simple measure, but it must first cover the 6.4% asset-share deficit on the 2011 to 2015 cohort. If that cohort is, say, 20% of the fund (₹2,480 crore), the deficit is about ₹159 crore, leaving roughly ₹250 crore of genuinely free estate, about 2% of the fund.
• The terminal bonus of 1.50% on ₹4,100 crore sum assured costs ₹61.5 crore at maturity; discounted at 7.05% over an average remaining term of six years, its present value is about ₹41 crore. That looks affordable today, but it pre-commits future surplus.
• A 100 basis point fall in yields cuts reinvestment income on a book with a duration of about seven years by roughly 0.7% a year, turning the ₹80 crore annual surplus into perhaps ₹20 to ₹25 crore. The terminal bonus would then absorb two years of the entire surplus, and the estate would be needed to keep the reversionary rate.

Governance recommendation. Declare the terminal bonus as a percentage reviewed each year, not a multi-year promise. Set an explicit trigger: if the free estate falls below 1.5% of the fund, or if the projected yield on reinvestment falls below 7.0%, the terminal bonus is reduced or withdrawn. Document the supportability calculation, the assumed yield curve and the cohort-level asset shares in the actuarial report, and make sure the policyholder communication does not create a reasonable expectation of a fixed terminal bonus.

The par block sits in the variable fee approach, not the general model.

• Because policyholders participate in the return on a clearly identified pool of underlying items and the entity receives a fee for services, the contracts meet the variable fee criteria. The entity's fee is the shareholder's 10% share of the surplus, so the fulfilment cash flows include the policyholders' 90% share as a liability and the entity's share drives the contractual service margin.
• The contractual service margin is the present value of the expected shareholder fee less any day-one loss, recognised over the coverage period. Under the variable fee approach the margin is unlocked for changes in the entity's share of the underlying items, including the effect of investment returns, so it is not a frozen number.
• Consequence for bonus policy: declaring a higher bonus reduces the shareholder fee and therefore reduces the contractual service margin and future profit emergence. The bonus decision is now an accounting event, not only an actuarial one, and the actuary must show the board the contractual service margin impact alongside the policyholder fairness test.
• Transition: full retrospective application for a 2006 to 2010 block will usually be impracticable because of data gaps on historical asset shares and expenses. Expect to use the modified retrospective approach, or fair value at transition, and document why. Existing reserves must be restated and the effect on distributable profit explained to the audit committee.
• Disclosure: the sensitivity of the contractual service margin to a 100 basis point fall in yields, and the linkage between declared bonuses and the variable fee, should be in the financial statements and the actuary's report.