Society of Actuaries releases updated mortality tables

November 07, 2014

On October 27, 2014, the Society of Actuaries published its (new) RP-2014 Mortality Tables and Mortality Improvement Scale MP-2014, related reports, and two documents responding to comments on its exposure draft from earlier this year. We will refer to this group of documents as the SOA Report.

The base mortality tables/improvement scale are unchanged from the exposure draft, which we discussed in this article. The Society did, however, in response to comments, amend its report to allow pension actuaries more flexibility in the development of tables and mortality improvement scales.

Defined benefit plan sponsors will want to consult their actuary as to the application of the new tables to their plan. In this article we briefly review the SOA RP-2014 report, focusing on its consequences for regulatory purposes (we do not, e.g., discuss the implications of the RP-2014 tables for purposes of financial disclosure). We begin with a brief discussion of the regulatory framework.

Regulatory framework – funding and lump sums

We're going to look at two issues, minimum funding and the calculation of lump sums. The assumptions – interest rate and mortality – used to calculate lump sums are, of course, critical for de-risking transactions.

Currently, for funding, the applicable IRS regulation requires the use of mortality tables based on the SOA's RP-2000 Mortality Tables Report. Under the regulation, mortality assumptions in those tables (which calculate life expectancies/mortality as of the year 2000) must be updated for mortality improvement since 2000 in one of two ways: (1) by the use of a ‘generational table,’ which generally calculates different life expectancies based on year of birth; or (2) a ‘static table’ that makes fixed and generally applicable projections of mortality improvements. In either case, the mortality improvements are based on the SOA's Mortality Projection Scale AA.

Certain sponsors may use substitute tables, provided they meet certain requirements. Substitute tables might be appropriate, e.g. where the sponsor's workforce has significantly higher mortality than the rates in RP-2000.

In Notice 2013-49, IRS published updated static mortality tables for use in funding for 2014 and 2015.

Whether generational or static/projected scale tables are used, the mortality assumptions used for funding are sex-based. For purposes of lump sums, IRS publishes unisex tables based on RP-2000 updated for mortality improvements using Scale AA. Those tables are "based on a fixed blend of 50% of the static male combined mortality rates and 50% of the static female combined mortality rates." Notice 2013-49 includes unisex tables to be used in 2014 and 2015 in calculating lump sums.

Since we already have mortality tables for 2014 and 2015 for funding and lump sum calculations, as the SOA stated, "[t]he earliest calendar year that any new basis for 'applicable mortality tables' [under Tax Code rules] could be prescribed is 2016.”

Financial impact

The RP-2014 tables/improvement scale reflect significant increases in mortality improvement relative to the current regulatory regime (RP-2000 plus mortality improvement Scale AA projection).

If (as most believe) IRS adopts the RP-2014 tables/MP-2014 improvement scale, then the cost of funding and lump sums will go up. The following table estimates the increase in annuity values for minimum funding purposes that would result from the adoption of the RP-2014 mortality tables/MP-2014 improvement scale by IRS for 2016.

 
   Age   
 Males  25  9.8%
 35  7.9%
 45  5.4%
 55  3.6%
 65  4.5%
 75  9.8%
 85  16.9% 
 Females   25  11.8%
 35  10.3%
 45  8.3%
 55  6.6%
 65  5.8%
 75  8.0%
 85  10.7%
(Excerpted from the SOA Response to Comments on RP-2014 Mortality Tables Exposure Draft)

This is, obviously, an estimate. But, clearly, if IRS adopts the RP-2014 mortality tables/improvement scale, liability valuations would go up significantly. E.g., for de-risking purposes, if you were to take the IRS approach of averaging male/female mortality 50/50, the lump sum value of a benefit for a 55 year old would increase by around 5.1%, simply because of the new mortality assumptions.

Added flexibility

In response to comments, the SOA amended language in the exposure draft to allow for greater flexibility in the adoption of RP-2014. In its Response to Comments the SOA stated that the language "provides pension actuaries with the flexibility needed for all varieties of plan populations and applications.”

Recognizing the subjective nature of estimates of mortality improvement, the SOA also amended the language with respect to the "Recommended Application" of the mortality improvement scale. In its Response to Comments the SOA stated that the amended language "makes it clear that reasonable alternate assumption sets can be used by a pension actuary.”

Generational only?

As we noted, currently actuaries may use static tables reflecting a fixed projection rather than fully generational tables. Indeed, according to the SOA report, "[m]ost U.S. pension actuaries use IRS-published static tables (based on Scale AA projection) for minimum funding purposes ...." In Notice 2013-49 IRS asked for comments on whether this was still necessary.

As noted, the SOA softened its language on this issue. In its exposure draft, it stated that the SOA:

[R]ecommends ... the measurement of U.S. private retirement plan obligations be based on the appropriate RP-2014 Table projected generationally for calendar years after 2014 using Scale MP-2014 mortality improvement rates.

In the final report this language was changed to read that the SOA:

[R]ecommends generational projection of mortality rates using Scale MP-2014, or an appropriately parameterized version of the RPEC_2014 model.

What position IRS takes on this issue may be significant.

Blue and white collar groups

One of the unusual things about RP-2014 is its blue collar/white collar weighting. Blue collar plan participants generally have a shorter life expectancy/higher mortality rate than white collar participants. Overgeneralizing, the RP-2000 dataset has close to a 50/50 blue collar/white collar split; the RP-2014 dataset is more heavily weighted to blue collar participants. In this regard, the RP-2014 report states:

Given the higher mortality rates typically experienced by blue collar participants, users should carefully consider the underlying characteristics of the covered group before automatically selecting the [base RP-2014] tables, especially for covered groups that contain a large percentage of white collar (or highly paid) participants.

Translation: all- or mostly-white collar plans may have to use even lower mortality rates than those in the base RP-2014 tables, with a corresponding greater increase in liabilities.

Whether IRS will consider this issue in revising its mortality tables is unclear.

* * *

Many groups, including the Academy of Actuaries, raised questions about the methodologies used by the SOA in developing RP-2014 and about the ‘prescriptive tone’ of its recommendations for application. The SOA did not change its numbers, but it did try to change its tone. Actuaries may have more flexibility in using the new tables, and that flexibility may in some cases mitigate their impact.

Overall, however, the message is clear: participants are living longer, and that means DB funding costs and lump sum valuations are going up.

October Three Consulting, LLC is a full service actuarial, consulting and technology firm that is a leading force behind the reemergence of defined benefit plans across the country. A primary focus of the consultants at October Three is the design and administration of comprehensive retirement benefits to employees that minimize the financial risks and volatility concerns employers face.

Through effective plan design strategies October Three believes successful financial outcomes are achievable for employers and employees alike. A critical element of those strategies is the ReDB® plan design. The ReDefined Benefit Plan® represents an entirely new, design-based approach to retirement and to the management of both the employer’s and the employee’s financial risk, focusing on maximizing financial efficiency and employee value.

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