In a recent interview with PLANSPONSOR, Dale Hall, managing director of research for the Society of Actuaries (SOA), said one of the Society’s goals is to significantly increase the frequency of mortality data updates. He said the Society’s Retirement Plan Experience Committee, which drives the massive research effort underlying the periodic mortality table updates, has created a goal to update its mortality improvement scales at least every three years.
“This came out of the fact that we’ve identified a pretty sizable list of things in our most recent report that will further drive mortality improvements over the coming years,” Hall noted. “It’s not news to say there are really striking shifts in mortality trends occurring in the United States. We feel it is important to bring faster and up-to-date recognition of where we are on mortality.”
Retirement plan sponsors may flinch when they hear the Society wants to introduce mortality updates more often, Hall admitted. Good news of added longevity aside, sponsors of defined benefit (DB) plans rely on the mortality tables to assess their pension liabilities and liquidity needs. Many worry about the revised numbers, which will likely cause increased liability and lowered funded status for the typical U.S. pension plan. Hall says the SOA itself predicts between 4% and 8% liability growth for a typical pension plan upon adoption of the new tables.
It’s not just the SOA urging plan sponsors to consider the impact of increasing longevity on pension plan funded status. A recent report from rating agency Moody’s found U.S. companies will have to divert $110 billion in the next seven years to fund additional pension liabilities arising from increased life expectancy. Using data from mortality tables published by the SOA, Moody’s calculated significant increases in the amount of cash firms would have to contribute to their pension plans in order to match growing liabilities. Moody’s suggests this environment will push more sponsors and employers to consider pension risk transfers and other means of paying down benefit obligations before the new tables actually take effect.
Moody’s even applied the 4% to 8% increase in the funding obligations for 10 of the biggest listed companies in the United States. At the top of the list sits IBM’s funding obligations for its pension plans, estimated at $99.7 billion in 2013. Moody’s calculations showed this could increase to as much as $113.6 billion at the top end of the SOA’s new assumptions.
Hall was quick to point out that more frequent mortality updates should actually prevent funding shocks for plan sponsors and fiduciaries, rather than create more. More frequent updates may mean more frequent mortality-driven increases in pension benefit liabilities, he admitted, but presumably the increases would be much smaller and regularly timed, and therefore much more manageable.
The SOA says the new mortality figures come from a peer-reviewed study of real retirement plan mortality experiences of participants in U.S. defined benefit plans—representing 10 million life years and over 220,000 deaths. In short, both men and women show approximately two years’ additional lifespan over SOA’s earlier tables. This will impact different plans more and less significantly, Hall said, based on their demographic profile and design.
“If you have a plan that is closed and there are not very many young participants, that might increase the impact of the new tables to some extent,” he said. “I’m sure you could come up with a lot of combinations that would be higher or lower, but for a typical plan, we’ll see a 4% to 8% liability increase.”
Of course, significantly accelerating such a substantial research effort will not be easy. Just the rollout process of the most recent tables started back in February 2014 with the release of an exposure draft, Hall noted. This was followed by a comment and review period that ran from February through the end of May, leading to additional tweaks and adjustments and peer review—and that was just the rollout of the finished tables. Hall said the initial research phases started as far back as 2009, when the Plan Experience Committee began collecting data from many different sources across the retirement plan and health care communities.
“From the beginning we were walking through independent reviews and audits, and after that process we had to get approval from the board of directors,” Hall added. “It’s an extensive and scientific process that leads up to the conclusion that, yes, these are the accurate tables. It will not be easy to accelerate the process, but we feel it is important to put this information out so that practicing actuaries can work with plan sponsors and auditors to make truly informed decisions in managing their pension obligations.”
Full versions of the 2014 Mortality Tables (RP-2014) and 2014 Mortality Improvement Scale (MP-2014) are available here.