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Aon Retirement and Investment Blog

U.S. Plan-Specific Mortality Studies—A Call to Action

In view of recent developments, sponsors of large pension and retiree welfare plans should consider studying their mortality experience during 2017 to:

  • Support effective plan design and risk management decisions
  • Better understand true liabilities and costs, and
  • For corporate-sponsored U.S. qualified pension plans, potentially reduce required cash contributions and insurance premiums in 2018+
Supporting Effective Plan Design and Risk Management
Plan sponsors are increasingly taking a data-driven approach to the design and financing of retirement plans. Mortality studies, often in the context of broader reviews of demographic assumptions, help quantify the expected costs and risks inherent in the benefits currently offered. 
Furthermore, a clear understanding of a plan’s true liabilities and funded percentage supports effective risk management. For example, focusing on some of the most prevalent strategies in the market:
  • Discretionary cash contributions are typically intended to reach a given funded percentage—to reduce insurance premiums, hedge liabilities with corresponding investments, and/or position the plan for settlements.
  • Lump sums and annuity purchases from insurers lock in a current price to permanently remove liabilities from the plan sponsor’s books.
  • “Glide path” or “hedge path” investment strategies usually de-risk the investments (e.g., by selling equities and buying long-duration bonds) as the funded percentage improves.
A mortality study produces more-precise liabilities. This refinement often has a very leveraged impact on the contributions needed to reach full funding or the cost-benefit analysis of whether/how to settle liabilities. In annuity purchases, a mortality study frequently reduces the premium paid to the insurer by providing the sponsor and insurers with more precise and reliable information about the plan’s population.

Improving Accounting Assumptions
Since 2014, the Society of Actuaries has published updated analysis of life expectancies for the U.S. private pension system and committed to annual updates of expected changes in life expectancies. Most companies have since incorporated this information into financial statements and related disclosures, generally increasing reported plan liabilities and costs.

Evolving actuarial and audit standards in a post-Sarbanes-Oxley world continue to increase the impetus for using more precise and data-driven assumptions. Reflecting the characteristics of a plan’s participants is the logical next step to mitigate unanticipated and unwelcome fluctuations in financial results.

Plan-specific analysis is the only way to reliably align life expectancy assumptions to a plan’s population—as opposed to trends based on a broader population. Where available plan-specific data is limited, a study should include a deep dive into the plan’s demographics, blending the experience with the most-relevant standard table(s).

Reducing Cash Requirements and Insurance Premiums
For many years, the Internal Revenue Service (IRS) has prescribed standard mortality assumptions for funding and insurance premium valuations of private sector U.S. qualified pension plans, which generally produced lower liabilities than more-current assumptions. Few plans have had enough deaths to be allowed to use plan-specific assumptions.

The IRS has proposed new mortality regulations, expected to be finalized in 2017 and effective in 2018. Under those regulations:
  • The standard assumptions will reflect more up-to-date life expectancies for a typical population, increasing cash and insurance premium requirements significantly for most plans.
  • To at least partially reflect plan-specific experience for a gender, a plan will need only 100 deaths over a period of up to 5 years. Many plans meet this required number of deaths, which is just 10% of the prior requirement.
  • A plan sponsor can study experience first, and then decide whether to incorporate that experience or retain the standard tables, depending on the financial implications.
Due to escalating insurance premiums, even a modest reduction in associated liabilities would allow many plans to quickly recoup the cost of a mortality study. This is especially likely for plan sponsors with blue collar (i.e., hourly or union) participants, relatively-low pay or benefit amounts, and/or participants concentrated in less-healthy regions.

Act Now
The business case for mortality studies is stronger than ever before. These studies inform plan design, potentially save cash and insurance premiums, and improve financial reporting. Plan sponsors should evaluate whether to act now to prepare for impending final regulations, a surge in annuity transactions, and intensifying pressure from auditors.

Matthew Bond is a Partner in the Norwalk, CT office of Aon Hewitt’s U.S. Retirement practice. He also leads Aon Hewitt’s U.S. Mortality Team. A pdf version of this blog entry is here.

Content prepared for U.S. subscribers, but available to interested subscribers of other regions.

The information contained above should be regarded as general information only. That is, your personal objectives, needs or financial situation were not taken into account when preparing this information. Accordingly, you should consider the appropriateness of acting on this information, particularly in the context of your own objectives, financial situation and needs. Nothing in this document should be treated as an authoritative statement of the law on any particular issue or specific case. Use of, or reliance upon any information in this post is at your sole discretion. It should not be construed as legal, tax or investment advice. Please consult with your independent professional for any such advice. The information contained within this blog is given as of the date indicated and does not intend to give information as of any other date. The delivery at any time shall not, under any circumstances, create any implication that there has been a change in the information since the date of publication, or any obligation to update or provide amendments after the original publication date. The blog content is intended for professional investors only.


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