An Update and a New Optional Mortality Improvement Table
The Society of Actuaries RPEC group (Retirement Plans Experience Committee) has released an updated mortality improvement scale (MP-2018) using a methodology similar to scales MP-2014 through MP-2017. The release incorporates an additional year of favorable historical experience vs. scale MP-2017. In general, the update should decrease plan liabilities slightly for plans that pay annuity type benefits. At the same time, the RPEC has recognized that stability has been a concern with scale MP each year, especially since stability is one of the stated goals of the committee designing the tables. Because of this, RPEC has published a second option in addition to the typical annual update. The second option provides a mortality improvement table that should be more stable year to year, but at the cost of some accuracy in tracking the historically volatile changes year to year in published mortality improvement data. For 2018, the more stable option generally results in a slight increase in plan liabilities vs. scale MP-2017.
Implications for Plan Sponsors
For sponsors electing to use the table constructed similarly to prior versions, the general impact of the updated Scale MP-2018 vs. Scale MP-2017 should be a reduction in ASC 715 balance sheet liabilities of about 0.3%. Younger groups with higher male concentrations of participants should see a slightly larger reduction, and groups that are primarily older with higher concentration in female participants, slightly smaller.
For sponsors electing the new second option that is more stable, an increase in balance sheet liabilities of approximately 0.3% or 0.4% should be expected versus those generated with scale MP-2017.
The choice seems simple. If a sponsor wants accuracy and is willing to tolerate higher volatility year to year, the original version seems preferable. If the fluctuations are problematic, and a sponsor prefers stability, then the second option would seem to be a better option. We do not expect significant changes in mortality improvement under either table unless there is a significant change in near-term mortality improvement like that seen in the early 2000s. Preliminary data doesn’t suggest any such change is afoot.
Implications for Plan Funding
IRS Sections 430 mortality and 417(e) mortality for single employer funding and minimum lump sum calculations, respectively, use scale MP improvement rates to project mortality rates. Tables for 2019 funding, PBGC and minimum lump sum calculations will reflect scale MP-2017 mortality improvement rates.
We expect that the IRS will continue to base future published tables on scale MP updates. It isn’t clear at the time of this article whether the IRS will prefer the original table or the new less volatile option in future years. We anticipate that the historical more volatile version of the MP rate updates may be preferable because that version better tracks reality.
David Weaver, FSA, EA, MAAA