People are living longer and pension plan sponsors will have to adjust their contribution models accordingly — but not until 2017, according to the Internal Revenue Service.
That’s a “credit positive,” says Moody’s Investors Service, as the IRS’ July decision not to update mortality assumptions to reflect today’s higher life expectancy will save pension plan sponsors at least $18 billion in 2016 as they continue to calculate minimum funding contributions using outdated models.
Market participants had widely expected the IRS to adopt the new mortality tables issued by the Society of Actuaries in 2014, which would increase sponsors’ projected benefit obligations 4% to 8%, or around $126 billion, according to Moody’s. However, the IRS will continue to use its current assumptions until 2017 as it evaluates the new tables.
This decision will also benefit sponsors by lowering the cost of lump sum buyouts offered to plan participants, which sponsors also calculate using the IRS’ mortality assumptions, according to the report, “U.S. Pension Plan Sponsors To Save at Least $18 Billion in 2016.”
“Delaying adoption of the new tables makes buyouts cheaper than we had expected,” Wesley Smyth, a Moody’s vice president and senior accounting analyst, said in a press release. “And while continuing to use these 15-year-old assumptions will increase liquidity for plan sponsors now, it is just delaying the inevitable adjustment. People are living longer, and the IRS will eventually have to adjust funding requirements to reflect that.”
Companies had been waiting for an IRS announcement on longevity to determine how much they actually had to put into their plans for regulatory purposes, according to the Wall Street Journal. Under federal law, companies must keep their plans fully funded. The IRS’ mortality assumptions, among other considerations, help determine the annual amounts companies must put into any underfunded plans.
According to Moody’s, the IRS’ decision to delay using the latest SOA mortality assumptions until 2017 came as a surprise, and will lower required contributions next year.
“The dollar impact of this change will be substantial,” the Moody’s analyst wrote.
By law, corporations have seven years to close the gap, which puts the annual hit at $18 billion.