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Editorial

Wrestling with mortality

Single-employer defined benefit plan sponsors can look forward to significant headaches as they prepare to implement the updated mortality tables issued by the Internal Revenue Services on Oct. 4 that take effect on Jan. 1, 2018.

Because the new tables go into effect in two and a half months, sponsors and their actuaries and consultants have only a short time to prepare to make any needed changes.

In the long run, these changes to the mortality tables likely will encourage more DB plan sponsors to drop those plans as soon as they can because they increase the burden on companies. The life expectancy of the average beneficiary has increased, so the IRS and plan sponsors must recognize that.

The new mortality tables will affect IRS minimum required contributions, Pension Benefit Guaranty Corp. variable-rate premiums, and lump sum distributions to terminated vested participants, generally raising costs.

At the aggregate level, the mortality tables that will take effect in the New Year will increase the aggregate liabilities of the corporate defined benefit system — including hybrid plans such as cash balance plans — by 2.9% to $2.343 trillion from $2.278 trillion, according to an analysis by the Society of Actuaries. For traditional pension plans alone, the increase would be between 3% and 5%.

The Society of Actuaries estimated the aggregate minimum required contributions would increase by 11% to $7.9 billion from $7.1 billion, and it estimated the aggregate PBGC premiums for 2018 would increase 12% to $9.6 billion from $8.6 billion.

The effects of the mortality table changes will differ by plan because of the different plan demographics, but they won't be good for anyone. The new mortality tables will increase underfunding of plans that are currently underfunded and move some plans slightly more than fully funded to an underfunded status.

An analysis in May by Cambridge Associates noted that sponsors of plans with an IRS funded status just above the key threshold levels of 80% or 60% "should examine whether the mortality table implementation would cause a breach of these levels, resulting in additional restrictions on the plan." The consulting firm suggested those sponsors should consider making additional contributions to avoid those restrictions.

Higher variable-rate premiums per $1,000 of underfunding were already scheduled to take effect in 2018. Now the additional premiums will be even higher than anticipated for underfunded plans because of the increased underfunding caused by the new mortality tables.

Plans that offer one-time lump sums to vested former employees, often done as a way to reduce longevity risk and ongoing plan costs including PBGC premiums, will find the value of the lump sum that must be paid will be higher in 2018 and later as a result of the new tables.

Cambridge Associates suggested that companies considering such lump sums should act before the end of the year to take advantage of the lower lump sums payable under the current mortality tables. They also point out that such lump-sum payouts have implications for the plan that should be carefully considered.

The new mortality tables thus should trigger careful reviews of the funded status of all corporate DB plans, their funding strategies, their policies on lump sum payouts to terminated vested employees — and even of their investment strategies.