In a report, Wilshire notes the impact of the new mortality tables on the liabilities for a particular plan depends on the demographic make-up of the pension plan population.
Wilshire expects that many corporate plan sponsors will use the new mortality tables to calculate their accounting liabilities for the 2014 year-end disclosure. Even though the table is still in exposure draft form, auditors are likely to require the use of these tables for 2014 fiscal year-end disclosures. This will immediately increase reported pension liabilities and therefore decrease reported pension surpluses or increase reported pension deficits on balance sheets. The increase in liabilities will increase pension expense or decrease pension income. For sponsors reporting under U.S. Generally Accepted Accounting Principles (GAAP), the increase in liability will likely be reflected in higher loss amortizations over the expected working lifetime of the plan population. For plans reporting under International Accounting Standards (IAS), the increase in liabilities will likely be reflected immediately in 2014 results. Finally, the increase in pension liability values will increase their duration (i.e. make liabilities more sensitive to interest rate changes).
When the impact of improved mortality is adopted by the Internal Revenue Service (IRS), the result will be lower funded ratios and higher minimum required contributions.
Wilshire notes many corporate pension plan sponsors have adopted funded ratio based de-risking glide paths. The liability used to calculate the funded ratio is often the Projected Benefit Obligation (PBO) or balance sheet liability. As a result of the mortality assumption change, the funded ratio used to determine the asset allocation will decrease and may indicate that an alternative, most likely higher risk, asset allocation is appropriate.
The report explains that currently, the ending funded ratio for many funded-ratio-based de-risking glide paths is 110% to 115%. The 10% to 15% surplus cushion is to account for when the actual plan experience does not match the assumptions used to value the liabilities, to protect against adverse pension market events, and to account for mortality assumption changes. When the liabilities are calculated using the updated mortality tables, the ending funded ratio can be adjusted down. For many plan sponsors, the current ending point allocation may still be appropriate.
Given a likely reduction in the ending funded ratio for the glide path, the allocations at each trigger point may need to be updated. For many plan sponsors, the existing allocations may still be appropriate, but may simply need to be shifted one trigger point lower (i.e. the current allocation at a 90% funded ratio may now serve as the new allocation at an 85% funded ratio). In any case, sponsors should review their policy to understand the implications and to ensure compliance, Wilshire says. For more about preparing for the effects of the new mortality tables, see “Planning for Mortality Tables Effect on DB Liabilities.”
As for pension risk transfers, the mortality tables that buy-in and buy-out annuity providers use to price annuity purchase rates are already in-line with the new table. Therefore, Wilshire does not anticipate further increases in annuity premiums due to mortality rate differences in the short term. For large transactions, annuity providers will most likely require a plan specific mortality study to more accurately price the cost of annuitization.
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