Written By John R. Markley (ASA, FCA, MAAA, FSPA, CPC)
After several years with the possibility of new mortality tables, 2018 will be the year!
In October, in Notice 2017-60, the IRS finally announced the mortality tables that will apply for 2018. The tables are derived from RP-2014 and the 2016 improvement scale (MP-2016) developed by the Society of Actuaries (SOA). Single employer pension plans will be required to use the new mortality for lump sums or similar benefits for 2018. The new mortality tables will also increase maximum benefits permitted under a pension plan in 2018. There was hope that the new mortality tables would be delayed another year based on the delay in issuance. However, the IRS was guided by the Pension Protection Act which said that new mortality tables must be utilized every 10 years and RP-2000 tables have been the standard since 2008. The new mortality tables will increase liabilities from 3% to 5% for lump sum distributions. For calendar year plans, 2017 would be the last year to terminate a plan and/or pay lump sums under the old, less expensive mortality tables.
The new mortality tables for lump sum purposes are static and unisex, meaning that a participant will have the same probability of mortality at age 60 whether they are age 60 in 2020 or 2050. The static tables have been adjusted and our preliminary analysis has shown that liabilities are comparable using the prescribed static table as opposed to the generational table.
Funding Mortality Tables
For funding, flexibility is available for 2018. Plan sponsors may continue to use the “old tables” for the 2018 valuation if:
- The plan sponsor concludes that the use of the new tables would be administratively impractical or would result in an adverse business impact that is greater than de minimis, and
- The plan sponsor notifies the plan actuary of the intent to use the “old tables” for the 2018 valuation.
Plan sponsors will want to delay the use of the new tables, if possible. The delay will reduce the minimum required contribution. Further, PBGC premiums are calculated based on the demographic assumptions used for minimum funding, so a delay would also reduce PBGC premiums. PBGC premiums are $38 for each $1,000 of underfunding, so delay in the implementation of the new mortality tables could save substantial PBGC premium for 2018. The regulations are not clear on eligibility to delay the implementation of the new mortality tables for funding purposes to 2019.
Brief History of Implementing the New Mortality Tables
The Society of Actuaries concluded a study of mortality in 2014 and issued a base mortality table (RP-2014) and an improvement scale (MP-2014). In each year starting with the issuance of Society of Actuaries tables, there was the possibility of new mortality tables that would increase the liabilities of plans. There was general agreement in the pension actuarial community regarding the RP-2014 mortality. However, there was significant debate regarding whether the MP-2014 projections for improvement in mortality were too substantial, which would increase the liability of pension plans in excess of future experience. The SOA has issued MP-2015, MP-2016 and MP-2017 based on mortality experience of the last 3 years and each year has indicated that the improvement projected in MP-2014 was overstated.
Plans Using their Own Experience
The IRS also issued Revenue Procedure 2017-55 which described the procedure for a plan to develop a mortality table based on its unique experience. To be eligible to use this revenue procedure, a plan must be sufficiently large to generate 100 deaths per gender over a 5 year period. A plan would need several thousand participants to have this experience. Medium and small plans would generally not be eligible to use their own mortality tables.
The race to beat the implementation of the new mortality tables is over. They are here! An existing plan can now develop a strategy to improve the funded status to reduce PBGC premiums or guide the Plan to termination over a several year period. Our firm has helped numerous employers accomplish this objective in recent years and we can help your plan! Please contact us for additional information.
For a PDF version of the article: New Mortality Tables for 2018