Society of Actuaries Sees Pension Obligations Shrinking Slightly

A slight decline in life expectancy due to a rise in mortality rates from three of the top 10 causes of death has led the Society of Actuaries to believe pension plans could see their obligations reduced a bit compared to last year’s scale.

The organization’s annual mortality improvement scale, or MP-2018, calculated that fund responsibilities could drop between 0.3% and 0.6% for men, and between 0.2% and 0.4% for women, when calculated using a 4% discount rate. The new scale was released Tuesday.

The reason for the mortality change is a jolt in deaths over the year from unintentional injuries (up 9.7%), Alzheimer’s disease (3.1%), and suicide (1.5%), according to the Centers for Disease Control and Prevention (CDC).

The society’s analysis determined that the life expectancy for private pension members decreased by a little less than a month for women (age 87.61), and just over a month in men (age 85.6), compared to 2017. This means the average beneficiary will receive their pensions for 22.61 and 20.6 years, respectively, on average.

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The yearly chart is made after data is collected and analyzed by the society from the Social Security Administration, the Centers for Disease Control and Prevention, the Centers for Medicare and Medicaid Services, and the US Census Bureau.

Dale Hall, the Society of Actuaries’ managing director of research, said the new scale continued trends that began in 2010.But, he added, because the age groups show varied levels of mortality, it is “imperative for industry professionals to perform their own calculations, using the demographics of their pension population to determine the impact of implementing MP-2018 on their individual plan.”

Tags: Mortality, Pension, Society of Actuaries

At 72%, the average 2017 funded status of public pension plans has barely changed in the past few years. And while it remains steady, trends are suggesting a larger gap brewing between the top and bottom thirds.

Splitting 180 plans from best-, worst-, and middle-funded levels from 2001 to 2017, the Center for State and Local Government Excellence (SLGE) and the Boston College Center for Retirement Research noticed the top plans average about 90% funded, while the bottom sit at about 55%—and continue to slip in the wake of the 2008-09 financial crisis.

Mid-level pensions averaged at 73% funded.

To change these measures, the collaborative paper, titled “Stability in Overall Pension Plan Funding Masks a Growing Divide,” said the declining tier will likely “require intervention beyond traditional reforms to change the trajectory of their funded status.”

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Due to smoothing rates, which averages three strong years and two weak ones, assets grew by 5.2%, to $3.64 trillion from $3.46 trillion, between 2016 and 2017. Actuarial liabilities grew by 4.9%, to $5.07 trillion from $4.83 trillion. The liability values are based on a plan’s annual discount rate.

While the costs of plans were about the same across the board, one of the top factors in the increased liabilities of these lower-tier plans was the lack of contributions paid. While the higher and middle bracket saw 95% and 80% of their required contributions, the bottom rung only obtained 74% of what they were promised.

Market corrections and underperformance also contributed to the pensions’ problems, with greater losses coming from the 55%-funded and below plans.

The top plans are fine for now as long as they don’t make any radical changes to their strategies, but the lower and middle are in varying degrees of trouble. The big concern is, of course, a market downturn within the next year.

In this scenario, the report says plans will either return exactly their assumed rates annually, or lose 15% of their assets. Should the best of those two scenarios occur, the average status could hit 76% by 2022. In the worst-case scenario, it’ll fall to 71%, even if plans generate strong returns from 2020 to 2022.

“Public pensions plans often are ‘clumped together’ when the funding status is described in policy discussions and covered by the news media,” Joshua M. Franzel, president and CEO of SLGE. “Generalizations often are made about all public plans as if they were monolithic, but they are not. The data indicate that state and local plans are not in the same fiscal position, do not face the same challenges, and do not have the same funding histories.”

Tags: Boston College Center for Retirement Research, Center for State and Local Government Excellence, Funded Status, Pension