The Wait is Almost Over!

In general, for purposes of calculating the present values in single-employer defined benefit pension plans for minimum funding requirements, PBGC premium payments and minimum lump sum amounts, plan sponsors must use the IRS prescribed mortality tables. Since 2014, it has been anticipated that the IRS would soon update the basis for the prescribed mortality tables. However, the IRS has deferred an update until just recently.

New Proposed Regulations

On December 29, 2016, the IRS proposed regulations that would update the prescribed mortality tables used for minimum funding standards and for determining PBGC premium payments. Furthermore, once finalized, these updated tables will be the basis for the update to the prescribed mortality tables used for determining minimum lump sum payments. The proposed effective date for these regulations is for plan years beginning on or after January 1, 2018.

How will the updated tables affect defined benefit plans?

The proposed prescribed mortality tables are based upon the most recent mortality tables and mortality improvement scales developed and first published by the Society of Actuaries (SOA) in late 2014. Because the SOA mortality tables and improvement scales assume a longer life expectancy than the current prescribed mortality tables, they result in larger present values of pension benefits. The magnitude of the increase in the present value of pension benefits varies and is dependent upon several factors, such as participants’ gender and age and the pension plan provisions. However, a very rough estimate of the increase for a typical plan is about 2 – 5 percent. This change will affect the following:

• Larger Minimum Funding Requirements
  Minimum required contributions will increase for most single employer pension plans. The exceptions are cash balance and similar type plans that assume participants will receive their account balance upon separation from service.
• Larger PBGC Premiums
  The PBGC variable rate premiums are based upon the unfunded vested benefits of a pension plan, which are calculated using the prescribed mortality tables. Consequently, variable rate premiums will increase for most single employer pension plans.
• Larger Lump Sum Payments
  The value of the lump sum payments for non-account balance plans will increase using the updated mortality tables – making it more expensive to pay lump sum benefits.
• Decreased Funded Status
  The increased present value of benefits will decrease the funded status for most single employer pension plans. The lower funded status could result in benefit restrictions and/or limitations to lump sum payments.

Closing window for derisking defined benefit plans?

It is very important for plan sponsors to consider the options to derisk their pension plans by opening a lump sum window. The window of time to use the current prescribed mortality tables to value lump sum payments is closing. Beginning on January 1, 2018, lump sum payments for non-account balance plans will become more expensive.

Other considerations

To prepare for and mitigate the change in the prescribed mortality tables, plan sponsors may want to consider:

• Stochastic or Deterministic Projections?
  Now might be a good time to reevaluate or update funding and PBGC premium projections using the proposed prescribed mortality tables.
• Substitute, Plan-Specific, Mortality Tables?
  The proposed regulations would allow some midsize to larger plans to use substitute, plan-specific, mortality tables. In general, a plan sponsor might be able to use substitute mortality tables that represent adjusted standard prescribed mortality tables. Plan sponsors might want to evaluate whether they are eligible to use a substitute table and if the substitute table would lessen the impact of the new regulations.
• Increase Funding above the Minimum?
  Plan sponsors might want to consider making additional contributions sooner than required to build a Prefunding Balance. The Prefunding Balance could then be used to stabilize funding requirements when the proposed prescribed mortality tables are in place.

If you would like to find out more about how these proposed regulations will affect your defined benefit plan, please contact a BPAS Actuarial & Pension Services consultant.