Updated mortality tables released by the IRS last week will make the cost of employers’ defined benefit plans more expensive.
That news will not come as a shock to plan sponsors and actuaries.
The IRS delayed implementing the new mortality numbers, which impact how plans calculate funding status, annual required contributions to pension plans, and the premiums they pay the Pension Benefit Guaranty Corp., in 2015.
The numbers reflect the fact that Americans are living longer. The mortality tables, produced by the Society of Actuaries, show the average 65 year-old male can expect to live to 86.6 years of age; the average 65 year-old female can expect to live to 88.2 years of age.
The IRS last implemented new mortality numbers in 2000. The Pension Protection Act of 2006 requires the tables to be revised every 10 years.
The upshot of the new numbers is that pension plan liabilities will increase, in turn reducing individual plans’ funded status, according to SOA.
And that means many plans’ required minimum contributions will go up, along with premiums paid to PBGC.
Last April, the SOA estimated aggregate required contributions for all plans will increase 11 percent in 2018, from $7.1 billion to $7.9 billion.
Many plan sponsors have been contributing more than the required minimum in recent years, the SOA noted.
Premium payments to PBGC are expected to increase 12 percent next year, from $8.6 billion to $9.6 billion.
Josh Barbash, an asset allocation strategist at Russell Investments, said the impact of the new mortality numbers will vary from plan to plan.
“It is difficult to generalize about the near–term impact on contributions since many plan sponsors are fairly well–funded and the impact is amortized over seven years,” Barbash wrote in a blog post.
“Further, some plan sponsors have been contributing more than the minimum required amounts in recent years, so an increase in the required minimum will not necessarily change the actual amount contributed,” he added.
Lump sum payment costs going up too
In recent years, employers that sponsor defined benefit plans have increasingly offered current and retired workers lump sum pension buyouts to mitigate pension costs and volatility in funding requirements.
The new mortality tables will also be applied to calculating the lump-sum payments, and will make them more expensive for sponsors.
Barbash said the buyout activity seen in the past two years will slow in 2018 as a result of the new tables.
“This is likely to reduce the popularity of offering lump sums to terminated participants, since they will become more expensive for plans,” he wrote.
Barbash said the fourth quarter of this year may bring more lump-sum offers from employers, as they take advantage of current longevity estimations before the new mortality tables are implemented in 2018.