Pension funds

Updated mortality tables are raising concerns

Contribution increases, higher liabilities likely; delay attempt underway

Ellen Kleinstuber
Ellen Kleinstuber said the private sector is already using updated mortality tables for financial statement reporting.

Updated mortality tables expected this year from the IRS will increase defined benefit plan contribution budgets and other pension fund calculations by billions of dollars beginning in plan year 2018, a new analysis shows, unless a recent attempt to slow the agency's work gains traction.

A Society of Actuaries report released April 26 projects updated mortality tables will increase pension liabilities and reduce plans' funded status in the short term. Minimum required contributions will increase 11%.

For estimated aggregate funding targets in 2018, liabilities would increase 2.9%, or $65 billion, and the aggregate funded status would drop 1 percentage point to 96%, as calculated by the SOA. Premiums paid to the Pension Benefit Guaranty Corp., which are based on plan funding levels, would increase 12% to $9.6 billion.

The SOA study is based on 7,500 single-employer plans that represent 98% of all liabilities.

Despite those increases, adjusting to updated tables now is better than making expensive catch-up contributions later, SOA experts noted. It also will be better for plan participants, pension advocates said. Annuities and lump-sum payments offered to plan participants have been below fair market value because of the outdated tables, they added.

Sensitive to the controversy that arose when the society released 2014 mortality tables after a 14-year gap, SOA officials already are collecting data from sponsors and hope to release the next update by 2020, said Dale Hall, managing director of research for the Society of Actuaries, Schaumburg, Ill. “We want to make sure that happens on a more frequent basis.”

When the Internal Revenue Service in late December proposed the updates based on the SOA's latest mortality tables and mortality improvement scale, plan sponsors did gain some flexibility: the option of choosing between two standard mortality tables, generational or static. Sponsors wanting to use mortality tables specific to their plan's demographics and death rates — referred to as mortality experiences — would also have updated tables, and many more would be able to use them thanks to the proposal's lower requirements. The current requirement that a plan have at least 1,000 participant deaths within two to five years to use custom tables would change to at least 100 deaths.

Balance sheet impact

Few practitioners debate that it is time to update the 10-year-old mortality tables now used by plan sponsors and their actuaries, especially since those tables are based on older life expectancy assumptions that have only seen minor annual updates by the IRS. Revisiting them was also required by the Pension Protection Act of 2006, which ordered a review by the Treasury secretary every decade.

The subject gets touchier when figuring out how updated tables will affect corporate balance sheets. The economic impact will be so dramatic, critics said at an April 13 IRS hearing on the proposal that the IRS should stand down until a more extensive economic impact analysis can be done.

That analysis is required, American Benefits Council outside counsel Kent Mason testified at the hearing, under President Donald Trump's executive order calling for two existing regulations to be cut before new regulations are issued, and because it is “significant” regulation that will cost some companies hundreds of millions of dollars.

There is also a question of timing. At that same hearing, Bruce Cadenhead, Mercer partner and chief actuary, testified on behalf of the ERISA Industry Committee that plan sponsors need at least 18 months to adopt the new tables. Not having the rules finalized by the end of summer would make 2018 implementation impossible, others agreed. IRS officials will be racing the clock to finalize them in time for 2018 planning.

With the widespread recognition that people are living longer, many companies already have updated the mortality tables used to project corporate liabilities on financial statements, prodded by their actuaries and auditors. “More and more plans started to look” at updating mortality calculations when the SOA released new tables in 2014, said Mr. Hall with the Society of Actuaries.

“When it comes to financial statement reporting, the tables that the IRS and Treasury are now proposing are already widely in use by private sector,” said Ellen Kleinstuber, who chairs the American Academy of Actuaries' pension committee.

“The bigger consideration is the impact on plan administration,” said Ms. Kleinstuber. Once the tables are finalized, employers will need to review their communications and test calculations before offering annuities or lump sums, and “there is no hard and fast answer. Some employers need a longer transition period.”

Custom tables to grow?

Many more plan sponsors are likely to seek IRS permission to use custom tables, which the proposed changes would allow. Pension plans “with higher rates of mortality are not as expensive, and many are looking at it,” said Mr. Cadenhead. For sponsors that choose to use the static tables, “off the bat you've already got an option that brings costs down a little bit.”

Compared to the few clients able to use custom tables now, “probably hundreds” would be able to use them because of the lower threshold for the number of deaths, said Alan Glickstein, Dallas-based senior retirement consultant at Willis Towers Watson PLC. “It's a huge deal but it's all how about it gets implemented. With different industries, you get very different outcomes,” he said.

Mr. Glickstein sees the updated mortality tables affecting much more than pension plan liabilities. “If you guess conservatively, it's billions and billions of dollars, and that extra money gets trapped in the pension plan, instead of (being available as) capital. It's just one more element of the complexity of managing a plan.”

The change could also spill over into public pension funds. “It has sparked questions for public-sector plans as to whether or not they should be reflecting the updates, and how they should do it,” said Ms. Kleinstuber with the American Academy of Actuaries.

She sees two schools of thought on whether public plans need to update their tables, which the Society of Actuaries will study next year. In the meantime, actuarial standards of practice require public plans to use their best estimates, said Ms. Kleinstuber. “There is a lot of professional judgment that comes into play. Different actuaries will have different views of what is going to happen in the future, and different plan sponsors may have different ideas.”

This article originally appeared in the May 1, 2017 print issue as, "Updated mortality tables are raising concerns".