The Impact of Changing the Retirement Age Assumption

The Hidden Power of the Retirement Assumption

For companies calculating their End-of-Service Gratuity (EOSG) under IAS 19, the assumed retirement age is often treated as a bureaucratic afterthought. "Just set it to 60, that's what the labor law mentions."

However, the retirement age is the absolute anchor point for the Projected Unit Credit Method (PUCM). It defines the total horizon of the liability. Shifting that assumption—for instance, increasing the expected retirement age from 60 to 65—triggers a cascade of complex mathematical counter-forces.

The Two Opposing Forces

When you extend the retirement age assumption, two opposing mathematical forces collide within the valuation model:

1. The Amplification Force (Salary Escalation)

If an employee is now assumed to work until 65 instead of 60, the model projects an additional five years of compounding salary increases. Because the EOSG payout is calculated on the absolute final basic salary, this dramatically increases the projected final payout value.

2. The Suppression Force (Heavy Discounting)

Conversely, because the expected payout event has been pushed five years further into the future, the present-value discounting mechanism is applied much more heavily. A dollar expected to be paid in 15 years is worth significantly less today than a dollar expected to be paid in 10 years.

Which Force Wins?

Whether changing the retirement age increases or decreases your overall liability depends entirely on the spread between your Salary Escalation Rate and your Discount Rate.

• If your Salary Escalation is higher than your Discount Rate (a high-inflation environment), extending the retirement age will generally increase the liability. The compounding wage growth outpaces the discounting factor.
• If your Discount Rate is higher than your Salary Escalation (a high-yield corporate bond environment), extending the retirement age will generally decrease the liability. The discounting suppression crushes the future liability faster than wages can grow.

Do not accept a generic "Age 60" assumption if your senior executive team historically works until age 67. The assumption must reflect actual corporate reality.