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Pension plan executives need to plan ahead for new mortality tables — report

Pension plan sponsors could be in for more surprises when the IRS updates mortality tables by 2018, according to a new report issued May 31 by Cambridge Associates.

Authors of the report, “Thought Mortality was Dead?,” caution that while companies' financial executives have largely modified their financial statements to reflect updated mortality assumptions released by the Society of Actuaries in 2014, the IRS' upcoming tables that will reflect those changes mean that, when it comes to pension decisions, plan sponsors could face more changes in three key areas: making minimum contribution requirements, paying Pension Benefit Guaranty Corp. premiums and deciding whether to make lump-sum distributions to vested former employees.

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, while minimum required contributions will increase 11%.

Cambridge found that the expected average mortality improvements of two to three years should trigger a 4% to 8% drop in reported funded status.

Until the IRS finalizes its proposed update, plan sponsors should weigh their options, said co-author Greg Meila, senior investment director in Cambridge's pension practice. “Unfortunately, there is no straight answer on any of these issues,” Mr. Meila said in an interview. “Clearly it has laid bare the fact that the rules can be very dramatically different for different purposes. It's difficult that a pension touches so many facets of an organization.”

He encourages company internal stakeholders — CEO, chief financial officer, treasurer and human resources team — to understand the impact on the organization of higher mortality rates, and how a funded status calculated for one purpose, such as contributions, may differ dramatically for others, such as risk transfers.

It is also critical to coordinate with external service providers such as the plan actuary, accounting auditor and consultant, the report said.

For sponsors already considering offering lump sums in the next few years, the rest of 2017 “offers a rare window in which, all else being equal, the value of the lump sum required to be paid will be lower than in 2018,” the report said.

The authors also note that it is a complex decision. Paying benefits, particularly large lump sums, lowers a plan's funded status, which can also impact future contribution requirements and possible restrictions on future lump sums. A lower asset base also makes it harder to close the deficit through asset returns, the report said.

“The optimal response to these three open questions really relies on the strategies that they care about the most,” said Mr. Meila.

The report is available on the Cambridge Associates website.