Pending Mortality Change Will Increase Pension Costs

Perspectives, August 2017

The IRS is expected to release final regulations very soon that will update the mortality basis for minimum funding and PBGC purposes. The assumption change outlined in the proposed regulation will affect the liability calculations used to determine the minimum required contribution, the PBGC premiums owed, and lump sum values paid out. While this change has been expected since the release of the SOA RP-2014 mortality table in 2014, the reality of increased contributions and PBGC costs may only feed DB plan sponsors’ frustrations, as expenses have already risen significantly over the last several years.

Society of Actuaries Predicts the Impact of Mortality Changes

The Society of Actuaries’ (SOA) recently released report estimates sizable aggregate increases in costs to plan sponsors due to the pending mortality changes. The report, which can be found on the SOA web site, predicts significant increases in the funding target liability, required contributions, and PBGC premiums.

Contributions to DB pension plans are expected to increase by $4 billion in 2018. Contributions are also expected to remain higher over the next 10 years using the new assumption versus the current mortality basis.

  • Funding target increases 2.9%, $65 B
  • Unfunded liability increases 35%, $22B
  • Normal cost increases 1.6%, $800 M
  • Min required contribution increase 11%, $800M
  • Actual contributions increase 4%, $4B

PBGC premiums paid by plan sponsors are expected to increase by approximately $1 billion in 2018. The PBGC premium Funding Target and the unfunded vested benefits are also expected to increase significantly with the assumption change.

  • Premium funding target increase 3.1%, $58B
  • Unfunded premium funding target increase 24%, $51B
  • Estimated premiums increase 12%, $1B

What does this mean for plan sponsors?

Regardless of the mortality assumption used in valuing liabilities, the actual experience of each plan’s population will dictate the benefits paid to participants. The SOA analysis concludes that while the updated assumptions may cause an up-front increase in costs, they will account for the correct level of mortality, which could mean recognizing smaller losses and less cost in the long-term.

The mortality table in the proposed regulation is based on the RP-2014 base table released by the SOA in 2014―a table that many plan sponsors already use to determine their accounting liability. This means the Funding Target will be much closer to the Projected Benefit Obligation (PBO) shown on the accounting disclosure. The proposed regulation does not impact plan accounting.

The SOA report did not estimate the impact of the mortality assumption change on the minimum present value for lump sum purposes since the proposed regulation did not set the specific mortality rates. It can be expected, however, the lump sum value calculated under section 417(e) will see a significant increase in most cases due to this assumption change. Many sponsors have already offered, or are considering offering, a lump sum to vested terminated participants prior to this assumption change going into effect.

The SOA report explicitly estimates the impact of the mortality change on an aggregate basis. For any given plan sponsor the impact will likely be different than for all plans in aggregate. For example, a cash balance plan would likely have a lesser impact than the numbers above indicated, while a traditional plan might be slightly more sensitive to the change.

As the IRS allows time to pass without releasing the final regulations, it is more likely this assumption change will not be effective for the January 1, 2018 plan year, as expected. However, even if this change is postponed another year, once it is in effect, the impact will be similar to what is described in the SOA report.

As increasing expenses and cash requirements from pension plans continue to plague plan sponsors, risk transfer has become an even more attractive option. Contact Prudential Retirement’s pension risk transfer team to discuss your risk management options.

REFERENCES

  • 1 REG‒112324‒15, RIN 1545‒BM71, Federal Register Vol. 81, No. 250, December 29, 2016, p. 95911.
    2 https://www.soa.org/research-reports/2017/2017-impact-mort-change-us-se-pension-plan/