Longer Life Expectancies May Increase Benefit Obligations

In late 2014 the Society of Actuaries released new mortality tables (RP-2014) that reflect longer life expectancies. The mortality rate is a key estimate used in valuing pension and postretirement plan obligations because it reflects the probability of future benefit payments, which are contingent on the life expectancies of your plan participants. Using these tables in your next benefit valuation could significantly impact (and increase) the future defined benefit obligations recorded in your financial statements.

Prior to the issuance of RP-2014, the RP-2000 was the most commonly used table. Using the latter table, a 65-year-old man was expected to live to age 83; a 65-year-old woman to age 85. Now the average life expectancy is 87 and 89, respectively. With this new data benefit obligations could potentially increase by 5 percent to 10 percent.

New or Old Tables?

Sponsors of defined benefit and postretirement benefit plans, including sponsors of frozen plans, must select reasonable assumptions in developing estimates to measure and record benefit obligations. From discount rates to mortality rates, these assumptions must reflect the conditions existing at the measurement date as evidenced by the best information available through the date the financial statements are available to be issued (the issuance date).

You aren’t required to use the new mortality tables when preparing the year-end benefit obligation accrual; other available information may represent a better estimate of mortality for the population of participants in your plan. However, you are required under generally accepted accounting principles (GAAP) to use your best estimate when measuring the benefit obligation, and in making that estimate, to consider all available information through the issuance date. Your auditors will want you to provide them with documentation that the selected mortality assumptions result in the best estimate of expected mortality for plan participants based on conditions existing as of the measurement date.

If you do decide to use the new tables, there are 11 tables or combinations of tables to consider when developing a mortality rate that is appropriate for your plan. There are separate tables for male and female; white collar, blue collar, and mixed collar; and low, high, and mixed salary. Using the right combination of tables will reflect the best demographic of your plan participants and result in the most accurate valuation of the benefit obligation.

Under GAAP, changes in the benefit obligation are typically reflected in other comprehensive income and amortized into income or expense over time. However, some companies adopt an accounting policy to immediately recognize actuarial gains and losses, in which case the entire change in the benefit obligation is recorded in earnings.

The American Institute of Certified Public Accountants recently issued technical guidance (TIS 3700.01) reminding accountants and auditors of nongovernmental plans that GAAP requires plan sponsors to use mortality assumptions most reflective of their plan’s future experience for purposes of estimating the benefit obligation as of the date the benefit obligation is presented in the financial statements. This applies regardless of whether your obligation is calculated as of the beginning of the plan year or the end of the plan year. You should expect questions from your auditors if you choose not to use the RP-2014 tables in your recorded defined benefit obligations:  If your plan actuary has already prepared a valuation without considering the new mortality tables, questions may arise as to whether that valuation contains the best estimate of participant mortality as of the measurement date. Be prepared to provide documentation showing why different mortality assumptions provide a better estimate of life expectancy for your plan’s participants. Don’t wait until the last minute to assess the implications of the new mortality data on your plan. Discuss the impact of the RP-2014 tables with plan management, the plan actuary, and your auditors.

We're Here to Help

For more information on how much impact the mortality table changes will have on your upcoming reporting, what you’ll have to do to comply, and what options, if any, you have in applying the new tables, watch our recent on-demand webcast, New RP-2014 Mortality Tables: How Long Will Your Plan Participants Live, and Can You Afford It? presented by Ian Altman of Altman & Cronin Benefit Consultants.