Raising or lowering the formula used to determine employees' pensions does drive costs. And, how long those pensions are paid also drives costs — so actual longevity matters.
But, here’s a trap. The recent mortality tables from the Society of Actuaries, reflecting significantly improved life expectancy, provoked this typical response: “The new tables will increase plan costs — perhaps by as much as 8%.”
That is, of course, not true. Because people in real life are living longer, pension costs already have increased. The new tables simply recognize that fact. Plans using “old” mortality assumptions that do not take into account recent improvements in mortality or projections of further improvements in the future are generally underestimating what recent research and wisdom tell us about life expectancy and trends in improving life expectancy.
The point is this: Assumptions don’t drive costs. Reality drives costs.
The same is true for investment returns. Pension costs are affected by the actual investment earnings on assets in pension funds, not by what we assume the earnings will be. Higher actual investment earnings means smaller contributions are necessary. However, merely assuming a higher investment return does not, unfortunately, translate to smaller contributions.
By the way, a stricter view of “cost” is that the cost of pensions is determined when the pensions are earned and does not change as investment earnings materialize. Any reduction or increase in contributions due to investment earnings comes from the risk/rewards of investing in a particular asset portfolio, not from the cost of the pension promise.