New Mortality Tables to Further Drive Interest In Pension Plan De-Risking, Attorney Predicts

A confluence of factors, including newly released mortality tables from the Society of Actuaries, will drive more defined benefit plans to consider pension plan de-risking, a benefits attorney said during a webinar and interview.         

“What happened in 2013 and 2014 made settlement strategies more attractive than ever before,” according to Rosina B. Barker, a partner at Ivins, Phillips &  Barker Chartered in Washington.

Barker spoke Oct. 29 during a webcast, titled Pension De-Risking: Developments, Opportunities and Strategies, sponsored by American Law Institute Continuing Legal Education. In addition to the new mortality tables, she cited the lower cost of borrowing money due to the low-interest-rate environment, higher plan asset levels and recurring increases in Pension Benefit Guaranty Corporation premiums as creating favorable conditions for pension plan de-risking.

The new mortality tables issued Oct. 27 by the Society of Actuaries reflect that Americans are living longer, with longevity improvements expected each year, Barker said. The data upon which the study is based reflects about 10.5 million life-years of exposure and more than 220,000 deaths, all from uninsured private defined benefit plans subject to Pension Protection Act funding rules, the report said.

The impact from these mortality tables alone is expected to be a 6 percent to 9 percent increase in costs for traditional ongoing defined benefit plans, Barker said.

Insurance companies are already using updated mortality estimates to price annuity contracts, Barker said. Company accounting for pension liabilities is only catching up now, as auditors will presumably expect pension liabilities to begin to be reported to shareholders using the updated mortality tables, she said.

This means that the cost of an annuity contract should diminish relative to the cost of the liability shown on the company's books, she said.

Other Factors 

Increased asset value and lower interest rates have created a favorable climate for plan de-risking as plans seek to lock in their pension liabilities at a lower fixed interest rate, Barker said.

“Interest rates have stayed pretty low relative to historic norms, making it easier for companies to borrow money and put cash in their plans in order to finance lump sums and annuities” she said, referring to two popular forms of pension plan de-risking.

In addition, recurring PBGC premium increases, including in the Bipartisan Budget Act of 2013, are “a constant source of risk for the increased cost of maintaining a plan.” The planned increase in variable-rate premiums—from $24 for each $1,000 of underfunding in 2015 to $29, plus inflation adjustments, in 2016—is a disincentive to underfunding but increases the costs of operating the plan, she said.

Motorola Solutions Inc., which in September announced its intention to purchase a group annuity contract from Prudential Insurance Co. of America for 30,000 retirees and offer a lump-sum payout of vested benefits to 32,000 former employees who haven't started getting pension payments, will reduce its PBGC premiums by nearly $2 million in 2015 and successive years, she said. Other companies that have recently announced plans to de-risk include Hartford Financial Services Group Inc..

Excerpted from a story that ran in Pension & Benefits Daily (10/29/2014).

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