Companies Need to Consider New Mortality Data in Pension Costs

Companies that sponsor retirement plans have some new, hard-to-ignore information to consider that promises to increase the cost of their plans.

The Society of Actuaries has released updated mortality tables that show pension plan participants are living longer. From 2000 to 2014, among males that reach age 65, overall longevity rose two years, with life expectancy rising from 84.6 years to 86.6 years. For women at 65, longevity rose 2.4 years, from 86.4 years to 88.8. SOA estimates that could produce a 4- to 8-percent increase in private pension plan liability.

The SOA says it updated its mortality tables and mortality improvement scale over a five-year period with the input of independent review committees and peer reviewers at multiple points in the process. The updated tables and improvement scale were subjected to a four-month public comment period, with input incorporated into the final reports, SOA says.

Under U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards, companies use various judgments and estimates, including mortality, to arrive at their calculated benefit plan obligations. SOA’s new mortality information is evidence companies will almost certainly have to consider under when calculating the corporate obligation for pension and other post-retirement benefits, unless they can convince auditors and regulators that they have a good reason to set aside the new information.

In an alert to clients, EY says the SOA’s findings could increase a sponsor’s benefit obligations and contributions, despite an effort by Congress earlier this year to provide companies with some funding relief. “Although sponsors are not required to use the tables or the improvement scale, they may need to consider the new mortality information when developing year-end mortality assumptions,” EY writes.

The firm points out plan sponsors will need to provide disclosures in management discussion and analysis at year-end about any significant changes in their benefit obligations, and sponsors that haven’t yet issued interim financial statements for the latest period should consider disclosures there as well. EY also says if the new mortality tables are used for calculating plan sponsors’ benefit costs and 

obligations, they should be consistently used for the plan’s financial statements as well.

“Adopting the new mortality tables or revising the projection scale could have a material effect on many U.S. companies’ measurement of their defined benefit pension and other postretirement obligations,” says Angela Storm, a partner with KPMG. “The effect of plan sponsors assuming improved mortality for plan participants is that their defined benefit obligations will increase. Some companies may experience a significant increase of 5 to 10 percent.”