For Pension Funding, IRS Issues Proposed Mortality Tables for 2018

Longer life expectancy increases pension liability by about 5%

By Stephen Miller, CEBS Jan 5, 2017
updated on Oct. 4, 2017

Update: IRS Finalizes Revised Mortality Tables for 2018

The IRS on Oct. 3, 2017, released final regulations on applicable mortality tables used by single-employer defined benefit plans to determine minimum funding requirements beginning in 2018. Although the regulation includes a limited transition option for using the old tables for purposes of funding and benefit restrictions, the updated mortality table forms the basis for 417(e)(3) minimum lump sum determinations regardless of whether the transition option is used.

The revised unisex table used for minimum and maximum benefits under IRC 417(e) and 415 were announced in Notice 2017-60. In addition, Revenue Procedure 2017-55 provides instructions for obtaining approval to use plan-specific mortality tables for pension funding and related purposes in lieu of the standard mortality tables generally required to be used.

"The final regulations adopt the mortality tables in the proposed regulations without change," said Scott Hittner, partner and chief actuary at plan advisory firm October Three Consulting in Greenwood Village, Colo. Regarding the use of substitute mortality tables, the final regulations made only modest changes and clarification of the rules in the proposed regulations, Hittner said.

Longer lifespans are a cause for celebration, even if they drive up the cost of pension funding.

Sponsors of defined benefit pension plans rely on IRS-issued mortality tables to determine minimum pension funding requirements, based on retirees' average life expectancies. The IRS released proposed regulations with 2018 mortality tables on Dec. 29.

After the projected mortality rates are derived for each age for each year, the rates are used to calculate the present value of a benefit stream that depends on the probability of survival year-by-year. The proposed rule would update the mortality tables used to determine minimum required contributions for single-employer plans and current liability for multiemployer plans effective for plan years beginning in 2018.

"The updated standard mortality tables may increase pension liabilities approximately 5 percent", said Scott Hittner, partner and chief actuary at plan advisory firm October Three Consulting in Greenwood Village, Colo. However, "the impact will vary from plan to plan and might be highest for retiree-heavy plans."

There should be no significant impact on cash balance hybrid plans, he noted.

"Many plan sponsors have been using roughly comparable assumptions in their corporate financial statements for the past two years," said Dave Suchsland, senior retirement consultant at Willis Towers Watson in Philadelphia. "As a result, we expect that relative to the current IRS funding assumptions, the proposed rule will generally increase liabilities for the funding valuation, which ultimately will result in higher pension plan contribution requirements beginning in 2019."

A recent analysis by Willis Towers Watson examined pension plan data for the 410 Fortune 1000 companies that sponsor U.S. defined benefit pension plans and have a December fiscal year end date. Results indicate that the aggregate pension funded status is estimated to be 80 percent at the end of 2016, down slightly from 81 percent at the end of 2015.

[SHRM members-only toolkit: Designing and Administering Defined Benefit Retirement Plans]

Using Substitute Tables

The proposed regulations would make substantial changes to the rules on using substitute mortality tables, based on so-called experience based mortality rates for a specific workforce, to determine single-employer minimum funding requirements, Hittner explained. "The changes would generally simplify the construction of experience-based substitute mortality tables and allow smaller plans not having 'fully credible' mortality data on their workforce to use a weighted average of the standard mortality table and the experience-based substitute mortality table that would result if the plan had fully credible data."

The U.S. Social Security Administration's most recent life-expectancy estimates show that men and women who turn 65 can now expect, on average, to live a further 19.3 and 21.6 years respectively—up from 15.4 and 19 years for those who turned 65 in 1985.

As women tend to live longer than men, substitute mortality tables are structured by gender, and if credible experience is not available for one gender, the standard table can be used for that gender, Hittner noted. "Small plans not having at least 100 deaths for a gender over a five-year period are not permitted to use a substitute mortality table, however," without receiving IRS approval, he pointed out.

The mortality table for minimum funding requirements also affects the calculation of unfunded vested benefit liability for Pension Benefit Guaranty Corp. variable-rate premium purposes. Therefore, "plans using standard tables and those newly adopting substitute tables would experience an impact on the calculation of unfunded vested benefits for variable-rate premium purposes," Hittner said.

There is a 90-day IRS comment period following the release of the proposed rules, ending on March 29, 2017, followed by an April 13 public hearing in Washington, D.C.

Next Steps for Plan Sponsors

In addition to increased minimum required contributions, a benefit brief from the Groom Law Group in Washington, D.C. noted that the increase in liabilities that is expected to occur for most plans under the new mortality tables could lead to the following consequences :

  • Higher lump sums. The new mortality provisions will assume a longer lifetime for the annuitant (or annuitants), making a lump sum distribution more expensive for these plans.

  • Lower funded status. With the increased liabilities and no corresponding change to plan assets, the funded level of a plan will decrease. This could trigger benefit accrual restrictions and/or limitations on lump sum distributions under Internal Revenue Code section 436, as well as PBGC reporting under ERISA section 4010.

  • Increased PBGC premiums. PBGC's variable-rate premiums (for single-employer plans), which are based on unfunded vested benefits, depend on the funded level of the plan. Thus, as liabilities increase under the new mortality provisions, plan sponsors subject to PBGC's variable rate premiums likely will owe more to the PBGC.

The law firm advised pension plan sponsors to consider taking the following steps in the coming months:

  • Review updated projectionsof minimum funding and PBGC premium requirements taking into account the proposed mortality table.

  • Evaluate whether the sponsor might be eligible to use a substitute mortality table, and whether doing so would result in savings.

  • Consider the impact on plan administration and benefit distribution calculations, including lump sum distributions.

  • Determine the potential impact on possible de-risking strategies for 2017, such as offering vested participants who are not current employees a lump-sum distribution or purchasing annuity contracts to satisfy a portion of its benefit obligations. 

'Last Best Chance' to Offer Lump Sums?

By postponing adoption of the updated mortality tables until 2018, the IRS has provided defined benefit plan sponsors "with one last opportunity to offer lump sums using the older mortality assumptions," said Brett Dutton, Philadelphia-based lead investment actuary at Vanguard, in a commentary posted on the firm's website.

In addition, "by reducing their plan's participant count by the number of terminated vested participants who accept a lump-sum window, a plan sponsor is reducing the amount it would pay in total PBGC premiums going forward after 2017," he noted.

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