Death, Taxes, and Pension Actuaries

Benjamin Franklin noted that “nothing is certain but death and taxes”. That phrase has particular irony for pension plan actuaries. While ultimately certain, we use mortality assumptions to calculate pension liabilities that in turn determine tax advantages. The mortality assumptions used in developing pension liabilities for IRS purposes are mandated by the Internal Revenue Code and IRS regulations. The mortality table changes incrementally each year to estimate the projected effects of increasing longevity. Pension law requires that mortality tables be updated every ten years based on actual new data. Proposed mortality tables were released in December of 2016 and are set to be effective in 2018 if approved.

Improving mortality rates mean plan participants are expected to live longer, and therefore receive benefit payments for longer periods of time. Those additional expected payments translate to higher plan liabilities and payouts if a participant elects a lump sum form of payment. These increases in liabilities and lump sums can impact other pension-related variables:

  1. The increased liability values may cause the plan’s funded ratio (AFTAP) to drop, possibly triggering benefit restrictions and participant notices.
  2. For plans covered by PBGC, the variable premium, which is based on the amount of unfunded benefits, may increase.
  3. Finally, lump sum payments to terminated participants will increase.

While these effects are imminent, plan sponsors can mitigate some of the increase by paying lump sums to terminated participants before the new table goes into effect.  It may result in some savings, both in the benefit payments to the participants, and future PBGC premiums (if covered). Participants can’t be forced to take lump sum distributions, but with a bit of gentle encouragement many will likely jump on the opportunity to take their money now, based on the current mortality tables.

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