The IRS’ decision to delay implementation of its new mortality tables until 2018 means pension plan sponsors must face new decisions and obligations related to minimum contribution requirements, Pension Benefit Guaranty Corporation (PBGC) premiums, and lump-sum distributions to vested former employees, according to a report from investment consulting firm Cambridge Associates.

In 2014, the Society of Actuaries released its draft of updated mortality assumptions, which was the first update in more than a decade. As such, the increase to life expectancies was two to three years, on average. By 2016, accounting auditors largely required defined benefit plan sponsors to use the updated assumptions on their financial statements, resulting in an average drop in reported funded status of 4%-8%, according to Cambridge Associates.

“The IRS’s delayed implementation of these mortality tables definitely creates a wrinkle for CFOs, and the answers aren’t straightforward,” says Greg Meila, senior investment director in the pension practice at Cambridge Associates, and coauthor of the report.

The report cites several new issues that CFOs and sponsors may have to address:

• Contributions to the plan may have to increase. Because the funded status determines the level of minimum required contributions, a decline in funded status means higher required contributions are needed to make up the deficit.
• Premiums due to the PBGC may rise dramatically for certain plans, because a lower funded status also means higher PBGC premiums.
• Lump-sum distributions may become key topics of discussion and decision-making. Paying out benefits while the plan is underfunded results in a lower funded status in percentage terms, said the report. And depleting funds means it will be harder to make up for shortfalls with investment returns.

“The CFO of a publicly traded corporate plan may care a great deal about the volatility of financial statement impacts, while a privately-held company CFO or non-profit CFO may care more about the timing and volatility of required contributions or the impact on debt covenants,” said Meila. “Tackling these issues calls for sponsors to craft an overall pension strategy that both incorporates and prioritizes the objectives most relevant to them, subject to their unique constraints and risk tolerances.”

The report also said that pension plan sponsors whose IRS funded status is just above the key threshold levels of 80% or 60% should examine whether the mortality table implementation would cause a violation of these levels, resulting in additional restrictions on the plan. “These sponsors may consider making a near-term contribution to avoid the regulatory consequences,” said the report.

Tags: Cambridge Associates, IRS, mortality tables, PBGC