New mortality tables from the Internal Revenue Service will keep plan sponsors busy adjusting calculations and putting more money into their defined benefit plans, but the bigger impact could be higher premiums owed to the Pension Benefit Guaranty Corp.
As people live longer, the updated, more conservative mortality tables released Oct. 4 mean that funding liabilities used to determine contributions to pension funds will go up by as much as 5%.
That in turn means that variable-rate premiums that sponsors pay to the PBGC for underfunded plans could also spike. Sponsors offering — or considering an offer of — lump-sum distributions to plan participants also will see those costs increase, beginning with the 2018 plan year when the tables take effect, and sponsors' ability to offer lump sums could be derailed.
While the tables will affect funding calculations, "that's just a sideline for what's going to happen with PBGC premiums," said Robert Collie, chief research strategist, Americas institutional with Russell Investments in Seattle. "That's going to be much more directly painful. It is more equivalent to another change to PBGC premiums, and that's just real money (sponsors) are not going to get back."
Many plan sponsors are making higher pension contributions to boost their funding ratio to avoid those variable premiums — and even borrowing the cash to do so, said Justin Owens, Seattle-based director of client strategy and research at Russell Investments, in the same interview. "We expect a meaningful uptick in contributions to avoid PBGC premiums, and this is just one more reason why they should do it sooner or later."
Under the new mortality tables, funding-target liabilities that affect funding ratios used to determine contributions and to set benefit restrictions, including when lump sums can be offered, are expected to increase as much as 4% or 5%, and liabilities used to calculate PBGC variable rate premiums will be higher.
The Society of Actuaries estimated that in 2018, minimum required contributions will increase 11% and liabilities for estimated aggregate funding targets could increase 2.9%, or $65 billion. Variable PBGC premiums based on plan funding levels could increase 12% to $9.6 billion, the SOA projects. For lump sums, the new IRS tables, which combine male and female tables, are expected to increase costs up to 5%.
Plan sponsors were not surprised that the IRS refreshed mortality tables, which were last updated for 2008. The Pension Protection Act of 2006 requires updates every 10 years, and companies have been using newer mortality tables issued in 2014 by the Society of Actuaries for their financial reporting since then, to show investors their pension expenses on corporate balance sheets. Waiting for the IRS to update the tables used for funding calculations with the SOA information was the missing piece.
What caught plan sponsors off guard was how late in the year it happened. The IRS proposed the updates in December 2016, but as 2017 entered the fourth quarter, plan sponsors and their advocates in Washington urged the IRS to hold off on issuing them until 2019 to allow enough time to adjust.
"The bigger deal is the timing," said Alan Glickstein, Dallas-based senior retirement consultant at Willis Towers Watson PLC. "For many plan sponsors, it's a very legitimate concern."
At an IRS hearing on the proposal, Bruce Cadenhead, Mercer LLC partner and chief actuary, testified on behalf of the ERISA Industry Committee that plan sponsors needed at least 18 months.
One small victory was that the IRS will allow a potential one-year delay if plan sponsors can prove an administrative hardship or a potentially significant business impact.
"That appears to be a very generous opt-out for funding (calculations) for 2018," said Mr. Cadenhead in an interview. With what appears to be a relatively simple self-certification process, "I expect a lot of sponsors to take advantage of it," he said.
Plans that do not elect a one-year delay will have to pay PBGC premiums that are due 9.5 months into the plan year, and file 5500 reports one year later.