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Benefit plan performance and fees
New Mortality Tables Will Affect Defined Benefit Pension Plan Sponsors
The Society of Actuaries (SOA) recently released new mortality tables (RP-2014) and a new mortality improvement scale (MP-2014). Sponsors of defined benefit pension plans, regardless of whether the participants’ plans are frozen, may need to consider the new tables when measuring benefit obligations and contributions in the current year.
The new mortality information reflects improved life expectancies and the belief that this trend will continue in the future. As a result, computed retirement obligations will increase.
Effect on defined benefit pension plan sponsors
- Plan sponsors should consider the revised mortality tables in developing 2014 assumptions affecting benefit obligations and contributions. Plan sponsors should be aware of the following issues:
- Although plan sponsors are not required to use the SOA tables, accounting standards require a “best estimate” when using assumptions such as life expectancy, and all available information must be considered as of the measurement date. (Accounting Standards Codification (ASC) 715-30-35-42 and ASC 715-60-35-72)
- Management’s Discussion and Analysis disclosures should reflect any significant changes in benefit obligations resulting from use of the tables.
- If the new tables are used to calculate the plan sponsor’s benefit costs and obligations, they should also be used for the plan’s financial statements.
- The IRS is expected to consider the new estimates when setting minimum funding standards for plans beginning in 2016. The Pension Protection Act of 2006 gives the IRS authority to prescribe mortality rates used in the calculation of funding liabilities.
- The revised mortality tables do not have an effect on the actuarial calculations or financial statement disclosures of defined benefit plans; only the plan sponsors are impacted.
Action items for plan sponsors
Plan sponsors should review the new tables and discuss them with their actuaries and auditors to evaluate how the new information will affect their retirement obligations, financial statement disclosures, and mortality rate assumptions.
Because life expectancies will most likely continue to increase, plan sponsors can anticipate the following in the near future:
- Higher contribution requirements
- Lower balance sheet funded status
- Increased lump-sum payouts
- Higher Pension Benefit Guaranty Corporation variable rate premiums
- Benefit restrictions
How we can help
Plan sponsors should assess funding, investment, and risk transfer strategies. If a plan sponsor is considering converting annuity benefits into lump sum cash-outs, it may be beneficial to complete the payouts before the IRS adopts the revised rates in 2016, which will increase the cost of conversions. CliftonLarsonAllen can provide further information and insight into pension risk reduction strategies.