The Society of Actuaries has analyzed the Internal Revenue Service’s proposed increases to the mortality tables that would apply to single employer pension plans in 2018, and has found that they will increase Pension Benefit Guaranteed Corporation (PBGC) premiums by 12%, from $8.6 billion to $9.6 billion.

They would also result in a 2.9% increase in the aggregate funding target liabilities, raising them by $65 billion, and decrease the aggregate funded status, from 97% to 96%. The aggregate funded percent would fall by a smaller percentage than the funding target would rise because many plans have enough surplus to cover the increase in their funding target, although their surplus would shrink. Plans that have a deficit on the current mortality basis would see an increased deficit, and it could be significant. And some plans with a small surplus would find themselves with a funding deficit. The authors estimate that the aggregate unfunded funding target (deficit) would increase 35%, from $63 billion to $85 billion, and the aggregate surplus would fall 14%, from $314 billion to $271 billion.

This study presents estimates of aggregate liabilities for minimum funding purposes (funding target) and funded status based on the following key assumptions:

• Actual contributions continue to follow recent patterns relative to plan funding levels as determined for both funding regulations and PBGC premiums;
• Treasury High Quality Market (HQM) corporate bond yield curve spot interest rates remain constant after 2016; and
• Asset returns after 2016 equal 6% annually.

Based on analysis of solely traditional pension plans, one might expect a slightly higher increase of 3% to 5% of aggregate funding target liabilities, depending on the discount rate and age and gender mix of a plan population. However, the mortality change does not affect cash balance liabilities to the same extent as traditional pension plans.

While cash balance liabilities make up a meaningful portion of the aggregate funding target, the precise portion is difficult to determine. Form 5500 and its Schedules do not provide for reporting the portion of liabilities that stems from cash balance benefit designs. In addition, some plans have both traditional and cash balance or other hybrid designs. After analysis and consultation with actuaries working with large single employer pension plans, the authors estimate that roughly 10% of the aggregate funding target stems from cash balance designs.

The proposed mortality change generates a smaller increase in the cost of current year benefit accruals (normal cost) than in the funding target. While the estimated funding target increase for 2018 is about 2.9%, the estimated increase in normal cost is only about 1.6%, from $49.6 billion to $50.4 billion.

The percentage increase is lower for the normal cost than the funding target for several reasons. Mortality assumption changes affect cash balance plan liabilities much less than traditional plan designs. Further, the proposed static projection method generates a lesser increase in the normal cost than in the funding target. The proposed method is intended to approximate generational projection. The authors find that the static approach generally accomplishes the goal for the funding target. But for the normal cost, the static approach falls slightly short of results based on generational projection, primarily because the approximation is less effective at ages below 40. Results for ages below 40 influence the normal cost to a much greater degree than the funding target, because the normal cost reflects results for only actively employed participants while the funding target reflects results for all participants.

Minimum required contributions will have to rise by 11%, from $7.1 billion to $7.9 billion, according to the Society of Actuaries. However, many plan sponsors have been contributing considerably more than the minimum amount required, it notes. Assuming that plan sponsors continue to follow similar contribution patterns as in recent years, the authors estimate that aggregate contributions for 2018 would rise about 4% because of the mortality update, from an estimated $94 billion to approximately $98 billion.

The full report may be downloaded from here.

– Lee Barney and Rebecca Moore