RP-2014 Mortality Tables – The Shock of Americans Living Longer

What has happened?

On October 27, 2014, the Society of Actuaries (SOA) released RP-2014 mortality tables and mortality improvement Scale MP-2014 that will “form a new basis for the measurement of retirement program obligations in the United States” [SOA – RP-2014 Mortality Tables Report]. This new basis reflects a substantial increase in the life expectancy of Americans. It is expected that audit firms will require retirement program sponsors to use the new tables to calculate accounting liabilities for 2014 fiscal year-end disclosures and it is also expected that the IRS will adopt the new tables for minimum funding requirements and lump-sum calculations for the 2016+ plan years.

Why is this shocking?

It is not shocking that the new mortality tables reflect the fact that Americans are living longer. Life expectancy has been increasing steadily in the United States over the last century and mortality tables based upon past experience undervalue the increased longevity. However, it might be very shocking to retirement program sponsors who will now be required to value obligations – reflecting retirees living longer – collecting more retirement benefits – which will inevitably increase retirement obligations. Based upon the timing of their adoption of the new mortality tables, most retirement program sponsors will soon be faced with:

• Larger balance sheet liability
• Larger required contributions
• Larger lump sum payments
• Larger variable rate Pension Benefit Guaranty Corporation (PBGC) premiums
• Larger gaps between obligations and assets

What are the expected increases?

The expected increases in obligations are heavily dependent upon, the mortality tables currently being used, and the demographics of the retirement program’s population. For example, if moving from the RP-2000 mortality table and generational mortality improvement Scale AA, the increase ranges from 5.5% to 10.5% for women and 2.5% to 17.4% for men for ages 25 to 85. If moving from the RP-2000 mortality table and generational mortality improvement Scale BB, the increase ranges from 2.2% to 3.8% for women and 1.7% to 9.5% for men for ages 25 to 85. Furthermore, the expected increase is magnified for post-retirement medical plans, where there is an expectation of rising future medical costs for benefits.

What can be done now to mitigate the future effect?

In anticipation of the new mortality tables, retirement program sponsors can take some proactive steps now, such as:

• Increase Voluntary Contributions to the retirement programs now to smooth the transition to larger required contributions
• Open Lump Sum Windows to take advantage of the “cheaper” current mortality tables – lump sums could increase by 6% to 10% under the new mortality tables
• Run Stochastic Forecasting to  analyze risk by reviewing projected funded status, cash flow and volatility of different funding strategies

Any one of these or other strategies may help mitigate the effect of the new mortality tables. Contact your consultant or Harbridge Consulting Group, a BPAS Company at www.bpas.com for assistance.