Ninety-Four Percent Funded? Not So Fast, Corporate Funds

With new mortality assumptions imminent, reports of a post-recession high for corporate pension funding ratios don't tell the whole story.

(April 29, 2014) — Healthcare and medicine have come a long way since 1995, and so too have US life expectancies. 

Most corporate pension plans, however, calculate their liabilities as if Bill Clinton was still in office. 

That’s about to change, as new drafts of mortality rates and improvement scales from the Society of Actuaries (SoA) enter the final month of their comment period.

“These two papers represent a dramatic change in mortality assumptions that will result in significant financial consequences for US pension plan sponsors,” according to an Aon Hewitt report published in February. “Although many variables come into play, the increase in liabilities could be 7% or more for many plan sponsors.” 

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The Internal Revenue Service has mandated that through 2015, corporations must base pension funding ratios and lump-sum payouts on the SoA’s last mortality table (RP-2000) and lifespan improvement projection (scale AA). Plan sponsors can use alternate assumptions for their financial statements, but according to Aon Hewitt, the majority rely on SoA standards. 

The new draft assumptions—RP-2014 for mortality rates and MP-2014 for mortality improvement over time—arose from a comprehensive study of US longevity initiated by the SoA in 2009. Actuaries examining mortality rates composed a dataset of private pension members and retirees covering 10.5 million individual life-years and more than 228,000 deaths. To project future improvements in longevity, researchers collaborated with the Social Security Administration and used data supplied by the Office of the Chief Actuary. 

The studies’ findings were terrific news for Americans keen on an eighth or ninth decade—and expensive news for the plan sponsors paying their pensions. 

A 65-year-old male, under the prevailing standard (RP-2000), is expected to live to 84.6 years of age. The new tables add just over 10%, assuming an 86.6-year lifespan. For a women of typical retirement age, life expectancy would climb from 86.4 to 88.8 years. 

Precisely how much these updated mortality rates and improvement projections would tack onto pension liabilities depends on a plan’s demographic make-up and operational status.  

For example, the new assumptions include substantially higher mortality rates for blue collar workers than those in white collar jobs. Shifting from the RP-2000 standard to the new draft assumptions would add 10.3% to an all white collar plan’s liabilities, based on Aon Hewitt’s calculation. For an all blue collar pension, the rise in obligations would be less than half (4.9%).

Both Aon Hewitt and the SoA stress that these updated mortality assumptions are far from finalized. The industry group would not provide aiCIO with a timeline for its final reports, and encouraged plan sponsors and others in the industry to review the drafts and submit feedback by the May 31 closing date.  

Related Content:Canadian Pensions Face Longevity Hike

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