The paper, “How Will the New RP-2014 Mortality Tables Affect My DB Plan Strategy?,” was authored by Justin Owens, an asset allocation strategist with Russell Investments in Seattle. These new tables, which were produced by the Society of Actuaries, reflect the longer lifetime of plan participants. Longer lives for participants means total expected benefit payments will increase, as will the plan’s time horizon, says Owens.
“Almost 15 years have passed since the last major mortality study was completed for pension plans, so certainly some changes were expected. While the increase in defined benefit liability has been fairly well known in the actuarial community for the last couple years as preliminary results have emerged, I don’t think there is a great awareness among plan sponsors that this change in coming. Sponsors usually don’t need to give the mortality assumption much thought,” Owens tells PLANSPONSOR.
According to the paper, other effects of the new mortality tables include:
- High employer contribution requirements;
- Lower balance sheet funded status;
- Higher lump sum payouts; and
- Higher Pension Benefit Guaranty Corporation (PBGC) variable rate premiums.
Owens says, “Plan sponsors can avoid being caught off guard by having their actuary estimate now what the liability increase could be, even though it’s not required. These tables aren’t in effect yet, but if sponsors know that liabilities will increase by 5%, for example, in the next couple years, they may choose to put more money into the plan now to stave off the one-time shock. Plan sponsors considering a temporary lump sum offer should also be aware that the amount they pay could change once the mortality basis is updated, probably increasing. This could affect when they choose to implement the offering.”
The paper notes that the timing for adoption of these new estimated mortality rates has not yet been decided. Best estimates are that the Internal Revenue Service will not review the new tables and approve them during 2014 or 2015, but rather that early 2016 will see use of the new tables for both funding requirements and lump sum conversions.
Owens encourages DB plan sponsors to be aware changes are coming and assess their plans accordingly. “Plan sponsors should start thinking about how this plays into their funding, investment and lump sum strategy now,” says Owens. “I expect most plan sponsors will appreciate knowing in advance how this change could affect them, and this should factor into decisions about how to fund the plan and how to strategically invest the assets, particularly if a liability-driven investing (LDI) strategy is in place.”
The paper notes that while some DB plan sponsors may choose to accelerate employer contributions in the near future in anticipation of the coming increase in liabilities, others may choose to recast their de-risking glide paths to reflect the new value of liabilities. For plan sponsors contemplating lump-sum cashouts, the timing of the mortality tables update could be a critical factor in their costs. According to Owens, lump sums will be more expensive once the new mortality tables are adopted, so DB plan sponsors may want to take advantage of the current pre-adoption period and pay out lump sums now.
The overall increase in liabilities for DB plans will vary, depending on factors such as the type of plan (i.e., how benefits are paid out), age distribution (with mature plans containing many older retirees see large increases), and gender distribution (with newer tables tending to have a greater impact on female-dominated plans).
With regard to the gender distribution factor, Owens says, “Broad generalizations are tough since the mortality rates didn’t change uniformly, and several factors play into this. However, larger increases will tend to occur for younger plans dominated by female employees, but the result could actually be the reverse for older plans that have more female retirees.”
Owens concludes that while plan sponsors cannot fully control the impact and timing of the coming changes, they can plan for it now. “The new tables should provide a more accurate reflection of the value of the plan,” he says. “In the end, this leads to fewer surprises and better strategic decisions.”
A copy of the paper can be downloaded here.