New Mortality Assumptions to Increase Employer Pension Costs

In the fall of 2014, the Society of Actuaries released new recommendations on how pension plans should project the lifespan of participants.

These recommendations  were the result of a years-long study that found that retirees are living longer than ever before. For instance, the new guidelines estimate that the average 65 year old male can be expected to live 2 years longer compared to previous assumptions.

Source: Aon Hewitt

While this is great news for retirees, for pension plans, increases in retiree lifespans mean:

• larger lump sum payments,

• increases in projected benefits and

• increases in required contributions

The size of these new costs will depend on the plan’s current assumptions about longevity and the demographics of plan participants. Lump sums and benefit calculations for older workers will see larger percentage increases because the additional projected years are added to a smaller number of total projected years. Actuaries at Aon Hewitt estimate that increases in plan liabilities could be 7% or more.

Employer plans will not be required to adopt these new projections until the IRS issues updated regulations. In a 2015 notice, the IRS said that they don’t expect to implement the new assumption until at least 2017 or possibly even later. As of right now there is no official timeline for these new projections to be implemented.

At the bargaining table, employers have begun demanding cuts to pay for these new costs. It’s important to remember that plans are under no obligation to adopt the new assumptions until the IRS issues new rules. Collectively bargained plans are allowed to maintain the old rates even after the IRS issues new regulations, as was the case in the recently ratified Verizon contract.

Links

Mortality Table Updates (Plan Sponsor, January 2015)

Society of Actuaries Finalizes New Mortality Assumptions (Aon Hewitt, November 2014)

IRS Notice 2015-53: Updated Static Mortality Tables for Defined Benefit Pension Plans for 2016 (IRS, August 17, 2015)

Verizon-CWA Pact Preserves Generous Lump Sum Pensions (Bloomberg BNA, June 8, 2016)