Changes are expected in 2016
The measured value of liabilities for most defined benefit plans will increase between 3% and 8% with the adoption of new mortality tables, said a report from Wilshire Consulting.
The tables, released by the Society of Actuaries in exposure draft form in February, reflect an increase in the life expectancy of Americans, resulting in increased pension plan liability values and liability durations.
For women ages 25 to 85, the liability increase ranges from 5.5% to 10.5%. For males in that age group, the increase ranges from 2.5% to 17.4%.
The tables most DB plans now use to measure pension liabilities were published by the Society of Actuaries in 2000.
The impact of the updated tables on a particular plan will depend on the makeup of its participants, said Jeff Leonard, managing director at Wilshire Associates Inc. and head of the actuarial services group of Wilshire Consulting, based in Pittsburgh. Some public and corporate plans are large enough to use custom mortality table and likely will stick with them, Mr. Leonard said.
For U.S. plans that rely on the industry tables, however, the mortality assumption changes are “another nail in the coffin” and might encourage some sponsoring entities to move away from DB plans altogether, Mr. Leonard said.
The mortality update “has given plan sponsors an opportunity to move away from DB plans to DC plans,” he said.
The tables are still in exposure draft form and probably won't be adopted by the IRS until plan year 2016 for funding purposes.
Because the mortality tables used to calculate minimum lump-sum distribution values for 2014 and 2015 plan years already have been released, many plan executives are taking this opportunity to offer lump sums. Under the new mortality tables, lump sums will be much higher because the number of monthly benefit payments would have increased.
“A lot of plan sponsors are saying they'll pay out terminated vested participants (now),” said Mr. Leonard. “Some sponsors are going further and paying retirees.”
Mr. Leonard said the new tables will likely not affect lump-sum calculations until 2016.
In light of the mortality changes, Wilshire also recommends plan executives review derisking glidepaths to ensure compliance with funding ratio triggers. Allocations might need to be shifted one trigger point lower as funding ratios decrease.
The mortality assumption changes were anticipated even before the tables were released, leading some plan executives to raise their ending funding ratios for glidepaths to 110% and 115%, said Mr. Leonard.
Liability-hedging portfolios should also be reviewed for compliance as longer liability durations will result in lower hedge ratios.
Wilshire anticipates audit firms will require sponsors to use the new tables to calculate their accounting liabilities for 2014 fiscal year-end disclosures.
Once the IRS adopts the mortality tables, funding ratios will drop and minimum required contributions will increase.
Plan executives should also prepare for increases in Pension Benefit Guaranty Corp. variable rate premiums, said Wilshire in its report.
The new tables do not change the true economic value or cost of plan liabilities, which are determined by the actual mortality of the plan participants.