Is Your Employee Benefit Plan Feeling the Impact of the New Mortality Tables?July 08, 2015
New tables are expected to increase liabilities anywhere between 3- 10% in some cases.
It is important for plan sponsors of defined benefit plans to understand the implications of the new mortality tables (issued by the Society of Actuaries in October 2014) as they prepare their 2014 plan financial statements and their subsequent corporate financials.
Many plan sponsors are just hearing about the new RP-2014 Mortality Tables Report and its effect on the actuarial information being used in their 2014 plan financial statements. Even if you are a plan sponsor who elects to use beginning of year actuarial information (i.e. January 1, 2014 for the December 31, 2014 financial statements), the effect of these new tables should be taken into consideration. The same applies to frozen plans. It is likely that your plan previously used the RP-2000 table.
Defined benefit plan sponsors work with their actuaries to incorporate assumptions about participants’ mortality in calculating the benefit liability for plan and corporate financial reporting purposes. GAAP requires the use of a mortality assumption that reflects the best estimate of future experience in calculating the plan’s obligation as of its chosen measurement date. These updated RP-2014 tables are considered the most current and complete benchmark to best estimate a plan’s future experience for calculating the obligation.
The updated tables reflect changes in mortality conditions based on recent historical trends and data that go back many years. They project higher benefit obligations due to increasing life expectancies in the United States - which means recording a larger liability on the financial statements of the plan and plan sponsor of an underfunded plan. The increased liability is reflective of higher calculated lump sum distributions and will result in increased minimum contribution funding requirements from plan sponsors. Although the specific impact will be based on each plan’s unique demographics, the new tables are expected to increase liabilities by a meaningful amount, with actuaries reporting increases of 3% to as high as 10%.
Despite the new tables being issued after a plan’s measurement date (or actuarial valuation) in 2014, the tables are regarded as a culmination of conditions that existed at and prior to the measurement date and need to be evaluated in order to consider all available information through the date the financials are available to be issued. GAAP does not prescribe the use of specific tables; however the AICPA has publicly discussed its expectation that these new tables will be used for most plans beginning in 2014. The IRS is likely to require the new tables for 2016 funding requirements.
Plan sponsors should discuss the new mortality tables with their actuarial consultant so that revised actuarial information can be obtained, if needed. If other tables or plan specific information were considered, there needs to be solid support for using an alternative approach.