Notes to and forming part of the Unconsolidated Financial Statements

For the year ended December 31, 2018

39.12 Maturity profile 2018

Post retire-
Pension Gratuity Benevolent ment
fund fund fund medical
benefit

The weighted average duration of the obligation (in years) 7.67 6.84 4.07 10.56

39.13 Funding Policy

The Bank endeavours to ensure that liabilities under the various employee benefit schemes are covered by the Fund on
any valuation date having regards to the various actuarial assumptions such as projected future salary increase, expected
future contributions to the fund, projected increase in liability associated with future service and the projected investment
income of the Fund.

Asset Volatility

Only three Schemes out of the all the Schemes are funded: Pension; Gratuity; and Benevolent Fund. The combined
investment of the three funds is Rs 9.4 billion. Almost 65% is invested in Government Bonds with a maturity that is less
than the maturity of the corresponding liability.

The asset class is volatile with reference to the yield on this class. This risk should be viewed together with change in the
bond yield risk.

There is an insignificant equity exposure of around 1%. While 32% is invested in corporate bonds giving rise to settlement
risk, the bonds are, though, high quality.

Changes in Bond Yields

There are two dimensions to the changes in Bond yields: first, as described above; second, the valuation of the Gratuity
Liability is discounted with reference to the government bond yields. So, any increase in Bond yields will lower the
Retirement Benefits Liability and vice versa, but, it will also lower the Asset values.

Inflation Risk

The salary inflation (especially the final salary risk) is the major risk that the Gratuity and compensated absences liability
carries. In pension fund the increased been determined by the Supreme Court does not carry this risk as the benefit is
practically no longer related to future salary increases. Some of the post-retirement medical benefits are capped to a
proportion of Pension, thus carrying no salary inflation risk. However, the hospitalization benefit is susceptible to medical
inflation risk.

In a general economic sense and in a longer view, there is a case that if bond yields increase, the ensuing change in salary
inflation generally offsets the gains from the decrease in discounted gratuity. But viewed with the fact that, for gratuity,
asset values will also decrease; the salary inflation does, as an overall effect, increases the net liability of the Bank.

Life Expectancy / Withdrawal Rate

The Gratuity and Compensated Absences are paid off at the maximum of age 60. The life expectancy is in almost minimal
range and is quite predictable in the ages when the employee is in the accredited employment of the Bank for the purpose
of the Gratuity and Compensated Absences. Thus, the risk of life expectancy is almost negligible. However, post-retirement
benefit given by the Bank like monthly pension, post-retirement medical gives rise to a significant risk which is quite difficult
to value even by using advance mortality improvement models. Thus, this risk carries valuation risk as well.

The withdrawal risk is dependent upon the: benefit structure; age and retention profile of the staff; the valuation
methodology; and long-term valuation assumptions. In this case, it is not a significant downside risk as higher withdrawal,
although troublesome for the Bank, will give rise to a release in the liability as retirement benefits for unvested due to
earlier withdrawal.

122 United Bank Limited