How will the New Mortality Tables Affect Your Retirement Plan?June 30, 2015
Jessie T. Kanter, CPA
In October 2014, the Society of Actuaries issued new mortality tables, which use updated data related to life expectancies in the United States. A full comprehensive study has not been done prior to this study conducted for use in the 2014 mortality tables since 2000. As expected, the new mortality tables indicate increased life expectancies, and this trend is expected to continue. These mortality tables are widely used by actuaries for defined benefit plans and other post-employment plans in determining estimates of pension and other post-employment benefit obligations.
The new mortality tables are expected to have a significant effect on pension and post-employment benefit obligations as a result of the updated data from the 2014 study. The new mortality tables show an increase in life expectancy for 65 year olds in the United States from 2000 to 2014 of approximately two years. The increased life expectancy will continue into the foreseeable future according to the study. As a result, retirement and post-employment obligations will increase. The increase in these obligations will affect both the retirement and post-employment plans and the plan sponsors. For example, the increased obligations will affect minimum funding and the funding status of benefit plans. Plan sponsors should expect increased lump-sum payouts and higher Pension Benefit Guaranty Corporation premiums as well. The updated tables will also affect the plan and plan sponsor’s financial reporting.
Effect on Financial Reporting for Plan Sponsors
Although U.S. Generally Accepted Accounting Principles (GAAP) does not require the use of updated mortality tables in the computation of benefit obligations, it does require the use of best estimates when utilizing assumptions in the determination of financial statement amounts. The AICPA issued TIS 3700.01 in February 2015, which addresses the use of the new mortality tables in nongovernmental employee benefit plans and non-governmental entities that sponsor employee benefit plans. Within this guidance, the AICPA states that GAAP “requires the use of a mortality assumptions that reflects the best estimate of the plan’s future experience for the purposes of estimating the plan’s obligation.” It further notes that “GAAP requires that all available information through the date the financial statements are available to be issued should be evaluated to determine if the information provides additional evidence about conditions that existed at the balance sheet date.” A plan sponsor should take into consideration the updated mortality tables when engaging an actuary to perform calculations related to the plan’s obligations. In addition, if the actuary has already provided reports related to the plan using the previously issued mortality tables, but the plan sponsor’s financial statements have not yet been issued, the plan sponsor should have the actuary update the reports using the new mortality tables. Generally, the new mortality tables would be considered the best estimate of mortality rates currently in effect.
Effect on Financial Reporting for Defined Benefit Plans
Similar to the plan sponsor’s financial reporting requirements, the defined benefit plan also needs to consider the updated mortality tables when determining estimates to be used within its financial statements. Many defined benefit pension plans present their plan obligations using beginning of the plan year information. The beginning of the year information may have been prepared prior to the publication of the new mortality tables. TIS 3700.01 clarifies that the plan sponsor should consider the new mortality tables regardless of whether beginning of the plan-year or end of the plan-year information is used in the actuarial calculations. The AICPA states “the existence of updated mortality conditions is not predicated upon the date that the updated mortality tables are published.” So, again, we go back to the standards within U.S. GAAP, noted previously, which requires the plan use all available information and assumptions when estimating the plan’s obligations through the date the financial statements are available to be issued.
For more information on the new mortality tables and AICPA guidance, refer to the following: