Segal Group Warns DB Plan Sponsors Not to Stray From Mortality Assumptions

The latest federal government report from the National Center for Health Statistics (NCHS) shows that life expectancy at birth declined for the second consecutive year, which could tempt defined benefit (DB) plan sponsors to conclude the latest data is good news for pension plan costs, according to Segal Consulting.

However, the firm notes that DB plan sponsors should look beyond the headlines, as life expectancy continues to improve for retirement-age Americans.

“Recent mortality rates observed for the older population continue to support expected improvements in projected life expectancy for this age group, which drives pension costs,” says Eli Greenblum, chief actuary for The Segal Group. “It is important for actuaries for all types of pension plans, including those who work with multiemployer and public-sector plans, not to reverse expectations for mortality improvement in response to the latest data.”

According to the NCHS, between 2015 and 2016, death rates increased significantly for the under-45 age groups studied. In contrast, death rates decreased for the post-65 retirement-age groups.

In fact, researchers from the Society of Actuaries (SOA) measured an ‘anomaly’ in mortality rate measures for 2016. SOA finds the overall age adjusted mortality rate for both genders from all causes of death decreased by 0.6% in 2016.

“This decrease in overall mortality may seem to run counter to the [Center for Disease Control’s] CDC’s report that life expectancy at birth declined 0.1 years in 2016,” the researchers note. “Generally, a decrease in the mortality rate would be expected to produce an increase in life expectancy. However, both figures are correct. In this respect, 2016 was a somewhat anomalous year.”

When the Society of Actuaries (SOA) released its annually-updated mortality improvement scale for pension plans, MP-2016, incorporating three additional years of Social Security Administration (SSA) data on U.S. population mortality, it suggested U.S. mortality continues to improve, but at a slower average rate of improvement than previous years, which may decrease pension plan obligations slightly.

“As additional experience emerges, there may be refinements necessary in actuaries’ assumptions for pension plans, but they should be based on longer-term trends. We should be cautious about setting long-term assumptions based on shorter-term trends, even when those trends last a decade,” warns Jeff Litwin, The Segal Group’s corporate research actuary.