Mortality: Back to Where We Started

by | Nov 27, 2018 | bytesize, Defined Benefit

Second only to the discount rate, the mortality assumption is the biggest driver of the pension liability on plans sponsors’ balance sheets. New mortality tables issued in 2014 reflected the substantial improvements in US mortality during the previous few decades and increased liabilities anywhere from 5% – 10%. Mortality updates are now issued annually so setting this assumption has become an annual point of discussion between plan sponsors, their actuaries, and their auditors. However, US mortality experience since the 2014 tables were issued has not lived up to expectations leading to higher than expected mortality rates and consequently lower liabilities. The latest table issued last month (MP 2018) has now completed the unwinding of most, if not all, of the liability impact absorbed by plan sponsors in 2014. This is good news for pension plan sponsors but raises some important questions that sponsors should understand.

How does this all work anyways?

The mortality assumption is made up of two pieces. The first piece is the base table of rates which tells us the probability someone will die in a given year (e.g. the probability that a 60 year old dies before age 61-it is small). These base tables are produced every 10 to 15 years as they involve collecting massive amounts of pension specific data. The second piece is a projection scale that accounts for the expectation that mortality will improve over time. By applying this scale the actuary can reflect that the probability of dying at age 60 for someone born in 1990 is smaller than for someone who was born in 1960.

Why have the mortality tables improved for plan sponsors?

The projection scales are altered every year to reflect actual mortality experience that is collected and published by the Social Security Administration. For the last several years mortality experience has improved but not as much as was expected by the original 2014 projection tables. The opioid epidemic and so called “life style” diseases have cut into the general, overall improvement in rates.

What can plan sponsors expect going forward?

Mortality rates have been improving for hundreds of years and there is every reason to expect that trend to continue. Over past five years updates in mortality experience has impacted liabilities between 0.5% and 2.0% each year. This is enough volatility to be noticeable but manageable. One would guess that the lower level of mortality improvement will stabilize and potentially reverse at some point in the future. Sponsors should not count on annual liability decreases due to the annual update in mortality experience. That said, it looks like 2019 may yet again bring slightly higher than expected mortality and “good news” for sponsors with slightly lower liabilities.

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