November 1, 2016
On October 20, 2016, the Society of Actuaries released updated mortality improvement factors for pension plans, Scale MP-2016. For many decades, there has been a steady (but volatile) decline in the death rates for post-retirement ages, so that the expected length of an employee’s retirement has significantly increased. The information from the Society of Actuaries reflects an analysis of the historical data and a framework for likely future mortality improvement.
These new improvement factors incorporate three additional years of Social Security Administration data on U.S. population mortality, in addition to the two additional years incorporated in last year’s Scale MP-2015. This recent information shows a dramatically different pattern of improvement than was evident in the first decade of this century. As a result, if Scale MP-2016 is considered, mortality rates will be higher and life expectancies will be shorter than under the 2014 or 2015 Society of Actuaries’ mortality improvement factors.
The new mortality improvement factors may affect GAAP accounting liabilities for single-employer pension plans. The effect of the new mortality improvement factors will vary by plan. Where liabilities have been previously determined using the 2014 or 2015 mortality improvement factors of the Society of Actuaries, it may be appropriate to use the updated factors, which would result in lower estimates of liability and cost. Where liabilities have been determined using other mortality improvement factors (such as the factors used by the Social Security Administration to project Social Security costs) that assumed lower improvement rates, updated mortality improvement information may have minimal immediate effect.
Scale MP-2016 does not directly affect the mortality tables that single-employer pension plans use for determining minimum funding requirements or the amount of lump sum distributions. The Department of Treasury is in the midst of revising the regulations that specify the mortality tables used for these purposes, and Scale MP-2016 will likely be considered in that ongoing project. Given that the mortality tables specified by the current regulations are based on data from about 20 years ago, it is expected that the changes to the regulations will result in an increase to the liabilities determined for those purposes. IRS Notice 2016–50 indicated that regulations with mortality table updates are scheduled to be effective in 2018.
Note that the mortality improvement assumptions should be determined in conjunction with the underlying mortality table and other assumptions used to calculate plan liabilities. The appropriate assumptions should be discussed with the plan’s actuary.