Compensation and Benefits Bulletin
The Society of Actuaries (SOA) finalized new mortality tables and a new mortality improvement scale that could increase plan sponsors’ benefit obligations and cash contributions. Plan sponsors may find it increasingly difficult to substantiate use of older mortality tables for accounting purposes, especially once the updated tables are mandated for ERISA valuation purposes.
Sponsors are not yet required to use the tables, but they need to consider the new mortality information when developing year-end assumptions and the associated benefit costs and obligations (regardless of whether the plan is frozen). The mortality rate is a key assumption used in valuing retirement plans because it reflects the duration of future benefit payments that are contingent upon plan participants’ life expectancies.
Defined benefit plan sponsors are required to measure costs and obligations using their “best estimate” for the plan under Accounting Standards Codification (ASC) 715-30-35-42 and ASC 715-60-35-72. Historically and for 2015 calendar-year ERISA cash funding valuations, the prescribed mortality rates are from the base RP-2000 Mortality Tables projected seven years past the valuation date using scaling factor table Scale AA for pension annuitants and 15 years past the valuation date for non-annuitants. The base (not projected) RP-2000 rates were developed using demographics from the 1990s. Scale AA was created to “project” the RP-2000 rates (or decrease the death rates) to better reflect lifespans as time passed, and it has been required for use in ERISA cash funding valuations.
Because Scale AA factors do not sufficiently adjust the RP-2000 rates to reflect current mortality experience, the SOA developed updated tables (RP-2014) for cash funding valuations based on more recent demographic experience. These were formerly released on Oct. 27, 2014. Most auditors generally prefer using the recently published tables and the Mortality Improvement Scale MP-2014. However, the updated rates are not yet mandated for cash funding valuation purposes, and the accounting guidance does not prescribe the use of a specific mortality table. (The guidance states that the mortality rates, as with all assumptions, should represent management’s best estimate of the expected duration of future benefit payments.) It may be reasonable not to use the updated tables in fiscal year-end ASC 715 disclosures, if the chosen mortality assumption is reflective of actual plan-specific demographic experience and future expectations, and if the plan sponsor is considering, discussing and planning for the change.
Going forward, plan sponsors should rely on their actuaries for substantive information to help with assumption setting, and they should discuss the proposed assumptions with their auditors to ensure agreement.
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