Life Expectancy Increases, 2000–2014
In 2014, the Society of Actuaries updated mortality tables to reflect increases in life expectancies.
n Male n Female
An SOA spokesperson told CIO magazine the IRS is proposing to
use mortality tables based on the RP-2014 tables, projected forward
using the SOA MP-2016 mortality improvement scale.
These changes will likely lower balance-sheet funded status,
resulting in a higher contribution requirement for most plans. That
means pricier lump-sum payouts for participants who prefer a lump
sum or an annuity, said Smith, who estimates liabilities will go up
anywhere from 3% to 8%, depending on the structure and nature
of the participant pool. Others, like John R. Markley, founder of
Markley Actuarial Services, estimated pension plan liabilities for
lump sum will creep even higher, between 4% and 10%. That also
means higher variable-rate premiums to the Pension Benefits Guaranty Corporation (PBGC).
With many defined benefit plans already frozen, Markley said
now is the time to consider terminating that plan since CIOs can
offer lump sums to participants using the old mortality instead of the
“CIOs for retirement plans should act quickly to minimize the
impact of the new mortality tables in 2018,” Markley said.
Markley suggests CIOs consider offering a lump sum window
where employees who have already been terminated employment
are offered a lump sum based on already accrued benefits that are
payable at age 65.
“If you do that in 2017 you can use the old morality tables, but
if you do it in 2018 you’ll have to use the new mortality tables,”
This doesn’t work in all situations. “If you are going to satisfy
Looking at LDI
liability by buying an annuity, that new price is already factored into
insurance rates,” Markley said. “But if you offer a lump sum, you will
not have to factor in the new mortality rates if you do it this year.”
Still, not every CIO will want to terminate their frozen plans,
especially if they don’t have enough money to make up the unfunded
liability. “It’s important to look at how many dollars the plan is
underfunded,” Markley said. “If it’s underfunded by a million
dollars and the employer doesn’t have access to an additional million,
terminating the plan isn’t an alternative you can use.”
Given that interest rates are rising and carry risk for most
defined benefit plans, many CIOs are developing new liability-driven
“LDI is an issue for an ongoing plan,” Markley said. “You
want to use it if your plan goes beyond 2018 to manage interest rate
Markley suggests considering two approaches. CIOs should
either match the expected payment of the plan with bonds on a year-
by-year basis or calculate the duration of the plan and then invest in
a mutual fund or fixed-income asset that matches the plan’s duration.
With the prospect of unfunded liabilities edging up under the
new mortality tables assumptions (see table, page 48), many pension
plans are struggling with how to hedge the new mortality assumptions and risk. “It’s like you’re paying for college based on a tuition
rate that is $50,000 a year and then the tuition table is updated,”
McShea said. “And then you try to calculate how much you are
going to owe when you didn’t plan on it but you need to try hedge it
out. It’s the same for mortality changes.”
Since the life of plan participants is extended, it’s forcing plan
sponsors to pony up additional cash.
“Many frozen plans were especially surprised at the spike in
liabilities,” he said. They were told by the actuaries that if they froze
their plan there wouldn’t be any additional costs. But that didn’t
happen because mortality rates improved and increased liabilities.
“Increase in mortality was quite significant,” said Scott Hawkins
a director of insurance research at Conning, citing a 3% to 7%
Age 25 Age 35 Age 45 Age 55 Age 65 Age 75 Age 85
Monthly deferred to 62 annuity due value
Source: This table is from the American Society of Pension Professionals & Actuaries based on data from the Society of Actuaries RP-2014 chart.