The Society of Actuaries (SOA) issued two final reports that update the mortality assumptions that private defined benefit retirement plans in the U.S. use in the actuarial valuations that determine a plan sponsor’s pension obligations. Affected pension plan sponsors should expect the value of the actuarial obligations to increase, but the rate of increase will depend on the specific demographic characteristics of the plan participants and the types of benefits provided.
The RP-2014 Mortality Tables Report (“RP-2014”) replaces the RP-2000 Mortality Tables Report (“RP-2000”), using the incidence of deaths in private plans over the 2004 through 2008 period. The SOA’s companion Mortality Improvement Scale MP-2014 Report (“MP-2014”) adds a second, complex variable to the RP-2014 tables for “future mortality improvements.” “Improvement” refers to the concept that mortality rates have generally decreased from year to year and this pattern is expected to continue in the future. The new MP-2014 improvement scale varies by both age and year. The SOA concluded that its best estimate for long-term mortality improvement in the U.S. is an ultimate annual rate of 1% through age 85 and slowly diminishing for higher ages.
The SOA committee that developed the tables recommends consideration of their use, effective immediately, for measuring private pension plan obligations. Their use also will affect the measurement of plan obligations associated with private employer postretirement health and life insurance plans.
Implications of the SOA’s reports include:
• The calculations to comply with the accounting standards for retirement plans (Financial Accounting Standards Board Topic 715) may be affected as early as for fiscal year-end 2014.
• Calculations to comply with IRS’s single-employer pension plan funding rules under the 2006 Pension Protection Act will not be affected until the Treasury Department formally adopts – possibly not until 2017 – a replacement for the current statutory tables (based on the RP-2000 Mortality Table). Minimum required cash contributions and, where applicable, lump-sum payments, will likely increase when the Treasury adopts a replacement mortality table.
• Although the SOA’s analysis acknowledged statistically significant structural differences in the underlying mortality rates produced for public and private plans, and therefore eliminated from the final RP-2014 report the data from “three extremely large public plans,” the SOA still states that “it would not necessarily be inappropriate or inconsistent for actuaries to consider…the RP-2014 tables as suitable mortality benchmarks for a specific public plan.”
• Public and multiemployer pension plans are not required to adopt these new tables. However, as these plans’ actuaries review the mortality assumption they currently use, they may find that information presented in the new tables may influence the plans’ assumptions as RP-2014 and MP-2014 become widely accepted. If the plans’ mortality assumptions are reviewed on a regular basis, the timing of the next review is not likely to be affected.
Actuarial calculations using the two-variable approach embodied in the RP-2014 and MP-2014 tables will be more complex when compared to current typical calculations using the RP-2000 table. And although pension obligations could increase, the effects will differ. For example, the obligations associated with a cash balance plan will likely only modestly change, while certain postretirement health insurance obligations may be the most dramatically affected.
Please contact your Milliman consultant for more details on how your defined benefit pension plan will be affected by the SOA’s new mortality table and mortality improvement scale.