Latest SOA analysis shows year-over-year increase in mortality

On October 20, 2017, the Society of Actuaries released its MP-2017 mortality improvement scale (reflecting historical U.S. population mortality experience through 2015). According to the SOA:

The age-adjusted mortality rates in the United States increased from 724.6 (per 100,000) in 2014 to 733.1 in 2015, an increase of 1.2%. This was the first year-over-year increase in the age-adjusted U.S. mortality rates since 2005, and only the seventh time since 1980 that those annual rates went up rather than down.

Reflecting this change, SOA stated that “most 2017 pension obligations calculated using Scale MP-2017 (with a discount rate of 4.0%) are anticipated to be approximately 0.7% to 1.0% lower than those calculated using Scale MP-2016.”

Affect on 2018 rules?

As we discussed in our article IRS finalizes mortality table guidance for 2018, after some controversy, IRS recently finalized a regulation adopting mortality tables/assumptions based on (among other things) the SOA’s 2016 mortality improvement scale (MP-2016) for purposes of funding, Pension Benefit Guaranty Corporation variable-rate premiums and lump sum valuations. The primary objection raised by critics of that regulation was that the SOA MP-2016 mortality improvement scale was too ‘aggressive’ – that is, that it assumed future mortality improvements that (the critics argued) were higher than and out of line with long run historical averages.

In the preamble to the regulation, IRS said it intends to (more or less) annually review applicable mortality improvement assumptions as they are revised by the SOA. It seems unlikely – notwithstanding that the new 2017 SOA scale has been published now (in 2017), before the IRS regulation’s 2018 effective date – that IRS will update its rules for 2018.

We note, however, that, if certain requirements are met, IRS’s final regulation allows sponsors to defer, for one year, compliance with the new regulation (and instead comply with rules under the prior regulation), for all purposes other than the calculation of lump sums. Doing so would allow the sponsor to defer adoption of the new (MP-2016) mortality improvement scale for 2018 (except for lump sum calculations). Presumably, by 2019 IRS will have adopted the SOA’s MP-2017 scale, with its increased mortality assumption and resulting lower pension obligations, lower funding requirements and lower variable-rate premiums.

Long-term implications

The SOA came under significant criticism for its MP-2014 mortality improvement scale for, among other things, its aggressive long-term mortality improvement assumption of a flat 1.0% rate to age 85. While it issued new MP-2015 and MP-2016 adjusting down assumed short run mortality improvements, the SOA did not (in either MP-2015 or MP-2016 or in the new MP-2017) change that long-term assumption. The SOA (in MP-2017) notes that “the long-term rate assumption has a proportionately greater impact on annuity values for younger lives relative to older lives because younger participants are more likely to survive to the period when the long-term rate is more influential on the overall projected rates of mortality.”

In adopting MP-2016 as the basis for its new regulation on mortality tables/assumptions, IRS explicitly addressed the arguments raised by critics of the SOA’s long-term mortality improvement assumption and rejected the alternatives they proposed.

Will the 2014-to-2015 increase in mortality reflected in MP-2017 cause either the IRS or the SOA to rethink that long-term assumption? It is at this point impossible to say, but certainly three years of results apparently ‘below model’ raise further concerns about it.

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We will continue to follow this issue.