Proposed New Funding Mortality Rates
By Gail Steward
On December 28, 2016, the IRS issued proposed regulations with new required mortality rates for defined benefit pension plans for funding purposes, effective starting in 2018. The proposed regulations don't address the mortality required for minimum lump sum calculations, but it is expected that the IRS will propose a unisex version of the new rates that will be effective in 2018 as well.
The proposed new mortality rates are expected to increase funding liabilities for single-employer plans by 3% - 5% and funding normal costs by 2% - 3% starting in 2018. PBGC premiums are also expected to increase, since these mortality rates must be used for the calculation of the unfunded vested benefits for the variable rate portion of the PBGC premium. Note that multiemployer and governmental plans are not impacted by these new rates.
Why new rates?
The Society of Actuaries, in 2014, released a study with updated mortality rates and expected future improvement in the rates. The rates were based on experience through 2006 and mortality improvement through 2014. Since then, updated expected mortality improvement factors have been issued annually that have included additional years' data. The improvement factors take into account not only how old a participant is, but in what year the participant will reach that age. This means that a 50-year-old participant in 2027 will be expected to live longer than a 50-year-old participant in 2017.
Since 2014 the actuarial and pension plan community has been waiting for the IRS to update the mandated mortality assumptions to reflect the new rates. The currently-in-use tables have not undergone a wholesale update since the PPA rules went into effect in 2008. The current mandated mortality rates are based on experience that is more than 20 years old. The tables have been updated annually to approximate mortality improvements, but have not kept pace with actual mortality improvements.
The rates are expected to be finalized fairly soon, and it is anticipated that new lump sum rates will be issued soon also. To determine the impact on your plan, consult with your actuaries. Your actuaries can also help you analyze strategies to consider in 2017, like lump sum offers for terminated vested participants, that can help mitigate the cost of the mortality improvements.