On December 29, 2016, IRS published a proposed regulation adopting new mortality tables for defined benefit plan valuations.
Here are the highlights:
The proposed regulation modifies IRS’s 2008 regulation, which generally provided rules for, among other things, base mortality tables, reflection of mortality improvement and the use of substitute mortality tables.
The proposed new tables are derived from the RP–2014 Mortality Tables published by the Society of Actuaries in 2014, which include significant mortality improvements and consequently generally increase the value of traditional DB plan benefits. The new tables/improvement scale will generally have only a modest effect on most hybrid/cash balance plans.
The proposal would (like the 2008 regulation) allow the use of either generational or annually updated static mortality tables. For updates, IRS is proposing using the MP–2016 Mortality Improvement Scale. The (originally proposed by the SOA) MP–2014 Mortality Improvement Scale was criticized by many sponsors and actuaries. So this decision to use the (much improved) MP–2016 Scale is good news. As in the past, IRS will publish (via Notice) updates (by year) to the static tables. Unlike under the 2008 regulation, IRS may, under the proposal, change the improvement scale based on SOA updates.
The proposal reflects the provisions of the Bipartisan Budget Act of 2015 (BBA 2015), which made it easier for sponsors to use customized, “substitute mortality tables,” and in this regard, the proposal generally looks workable.
The proposal does not address the application of the new tables/improvement scale to lump sum valuations.
The proposed regulation would generally be effective for 2018 plan years.
The major policy innovation included in the new proposal is the treatment of substitute mortality tables, and in the rest of this article we very briefly discuss IRS’s proposal with respect to them.
Substitute mortality tables
The BBA 2015 modified the 2008 regulation’s treatment of substitute mortality tables in two ways: (1) It required that the determination of what is “credible mortality experience” (justifying the use of a substitute table) be made based on “established actuarial credibility theory.” And (2) it permitted (as an alternative to a full substitute table) the use of mortality tables reflecting adjustments to the “generic” IRS tables to reflect actual plan experience.
Fully credible experience
The proposed rules implementing change (1) are quite technical. Bottom line: They generally bring IRS rules for “fully credible mortality information” into line with current actuarial practice. In that regard, they:
[R]equire a substitute mortality table to be constructed by multiplying the mortality rates from a projected version of the generally applicable base mortality table by a mortality ratio (that is, a ratio of the actual deaths for the plan population to expected deaths determined using the standard mortality tables for that population). Use of mortality ratios (rather than providing for the graduation of raw mortality rates as under the 2008 substitute mortality table regulations) should make it easier for plan sponsors to develop the substitute tables, because it would eliminate the need to apply a graduation technique. It would also make it easier for the IRS to review applications to use substitute mortality tables.
The calculation of the number of deaths needed for “full credibility” is now the product of 1,082 and a “benefit dispersion factor” reflecting the value of benefits.
Partially credible experience
The proposed rules implementing change (2) generally allow plans with at least 100 deaths per gender during an “experience study period” (“partially credible mortality information”) to use a hybrid of the generic IRS table and a plan table:
In accordance with established actuarial credibility theory, such a plan would use a weighted average of the standard mortality table … and the mortality table that would be developed for the plan if it were to have fully credible mortality information.
IRS also tweaked the 2008 regulation’s substitute mortality table rules for the aggregation of plans and for transition where, because of a corporate transaction, a new plan is added to the control group.