Defined Benefit plan actuaries use various assumptions to calculate a plan’s benefit liabilities for various purposes. One of the main assumptions employed is the rate of mortality for the plan’s population. The IRS requires specific mortality tables for some purposes, such as calculating the minimum funding requirement and calculating lump sum benefit payments. For other purposes specified mortality tables are not required, but the actuary is bound by Actuarial Standards of Practice (ASOP) that require use of mortality rates (and other assumptions) that will result in the best possible estimate of liabilities.
The RP-2000 mortality table that has been required for some purposes and often employed for other purposes is becoming outdated. In addition, experts believe that mortality improvements expected in the future should be better reflected in rates used to calculate current liabilities. Recently, the Society of Actuaries Retirement Plans Experience Committee (SOA RPEC) issued updated mortality tables referred to as RP-2014. A scale to reflect future improvements in mortality was also published, referred to as MP-2014. In general, RP-2014 is a set table of underlying mortality rates; and MP-2014 applies a scale to the underlying rates, projecting mortality improvements into the future. As an example of the impact of the new tables compared to the previously published tables, the life expectancy of a healthy 65 year old in 2014 increased 2.0 years for males and 2.4 years for females.
For minimum funding requirements and for purposes of calculating lump sum payouts, the IRS will eventually require use of the new tables, but not until at least the 2016 plan year, and possibly as late as the 2018 plan year. This is an important consideration when exploring the possibilities of de-risking by paying lump sums (see earlier blog about de-risking) because the impact of the new required rates will be an increase in lump sum values.
For pension accounting purposes actuaries should consider, in consultation with the plan sponsor and their unique circumstances, use of the new tables for 2014 and later disclosures. The updated mortality rates will create an increase in pension liabilities on the books, with the specific impact based on the demographics and other factors of the particular plan. The SOA has estimated an increase in liabilities of 4-8% if adopted in 2014. Because of the compounding effect of the mortality improvement scale, earlier adoption will serve to smooth the impact of the change.
If Watkins Ross prepares your pension disclosure report for your financial statements, expect to receive communication from us in advance of preparing the report regarding adoption of the new mortality rates. In the meantime, if you would like an estimate of the specific impact of the new rates on your plan’s liabilities, please contact us.
Blog authored by Cheryl Gabriel, CPC.