This base table and improvement scale were the most current as published by the Society of Actuaries (SOA) at the time of the new regulations. The improvement scale has been updated annually for the past three years, and subsequent annual updates are expected that will eventually modify the prescribed scale. Per IRS rules, the mortality tables are required to be updated every 10 years, at minimum, to reflect the mortality experience of pension plan participants and projected trends in that experience. The SOA has indicated that there has been a significant reduction in the rate of mortality improvement over the past few years when compared to the previous 25 years.
The improvement scale released in 2014 with RP-2014 was the MP-2014 scale, which was updated to the MP-2015 scale and MP-2016 scale the following years. In general, each update in improvement scale resulted in a decrease in plan liabilities of approximately 2%. Thus, it turns out the MP-2014 scale overstated life expectancy and pension plan liabilities. If this trend continues, subsequent versions of the MP improvement scale could result in further liability decreases. Should this happen, an unintended consequence would be that minimum required contributions and lump-sum payments may be overstated for several years.
Impact on Pension Plans
The new mortality tables are expected to increase pension plan liabilities by approximately 3% to 6% when compared to the prescribed tables for the 2017 plan year. This will generally decrease plans’ funded percentages and increase minimum required contributions, Pension Benefit Guaranty Corporation (PBGC) premiums and the number of plan sponsors required to report company financial information under the Employee Retirement Income Security Act of 1974 (ERISA) Section 4010. Similarly, lump-sum amounts for plans using a traditional benefit formula will increase, but plans using a hybrid benefit formula (such as a cash balance plan) will not be impacted. For hybrid plans that determine the amount of monthly annuity based on the 417(e)(3) mortality tables, the amount of the annuity may decrease based on the assumed increase in life expectancies. As previously mentioned, if the “rate of increase” in life expectancies continues to decline, the new mortality tables may have a reverse impact, causing plan liabilities and lump-sum amounts to become more similar to results based on the mortality tables used in 2017.
Substitute Mortality Tables
The regulations allow some plan sponsors to delay adoption of the new tables for actuarial valuations until the 2019 plan year, contingent on certain circumstances. While the new tables will be required for minimum lump-sum purposes, plan sponsors may use substitute mortality tables for the 2018 plan year if they can conclude that the new tables would be administratively impracticable or would result in an adverse business impact that is “greater than de minimis.” Currently, there is no clear guidance on what is considered a de minimis adverse business impact. For smaller plan sponsors, using substitute mortality tables may be worth consideration if the increase in minimum required contribution or PBGC premium is greater than de minimis. In such cases, plan sponsors must inform their actuary of an intent to apply this option.
Large plan sponsors may be able to use substitute mortality tables if their plans experience at least 100 deaths per year for each gender within the experience analyzed (for up to five plan years). Plans with over 1,000 deaths per year for each gender are considered fully credible, while plans with fewer deaths must blend their mortality experience with the prescribed tables. Doing so may result in assumed life expectancies that are more in line with the plan’s population and return a more appropriate liability for minimum required contributions and PBGC premiums. Per IRS requirements, substitute mortality tables do not apply to minimum lump sums.
Action Steps for Plan Sponsors
To prepare for these changes, plan sponsors should consider the following steps:
- Direct their actuary to model the impact of the new tables on their pension plan funding requirements and PBGC premiums.
- Determine if this impact could have an adverse effect on business that is greater than de minimis. If so, they should consider postponing the use of the new tables until 2019 and inform their actuary of this intent.
- Estimate the impact of the new tables on lump-sum distributions. Consider any additional steps that might be needed to evaluate asset allocations, employee communications or benefit distribution forms.
- If a plan qualifies for substitute mortality tables, consider whether or not the tables would decrease plan liabilities, required contributions and PBGC premiums.
- Determine if the new mortality tables require any plan amendments. Plan documents generally reference the “applicable mortality table” without specifying the particular table. If so, a plan amendment may not be required.
Get a Plan in Place
The new mortality tables give plan sponsors and actuaries a lot to consider over the coming months. There are proactive steps that can (and should) be taken now to help plan sponsors make the best decisions for their qualified pension plans. The retirement plan consultants at SilverStone Group are available to provide actuarial guidance and expert advice to help plan sponsors make informed decisions.
This article originally appeared in the 2017 | ISSUE THREE of the SilverLink magazine, under the title “Turning the Tables 2018 | New Mortality Tables for Qualified Pension Plans” To receive a complimentary subscription to the SilverLink magazine, sign up here.