The New RP-2014 Mortality Table Introduction and Impact for Plan Sponsors

December 9, 2014, 10:00am EST

2

Presenter

Matthew Klein, FSA, EAManaging Consultant

216.875.1938mklein@findleydavies.com

Use chat window for questions

3

Goal of today’s presentation

• NOT to delve into specifics of smoothing techniques, explanation of double-cubic methodology, or graduation and truncation procedures

• Focus on importance of mortality assumption

• Show the relative impact of the new mortality tables on actual pension plans

• Arm CFOs with the necessary information to have a conversation with auditors, actuaries, and other stakeholders on if/when to update the table

4

Background

• Preliminary draft issued by the Society of Actuaries February 2014

• Final Table issued October 27, 2014

• Applies to ASC accounting liabilities for pension and post retirement medical liabilities

• Does not currently apply to minimum funding requirements, funded status ratios for IRS, or lump sums. Implementation expected in 2017

5

Which table?

Not in Payment In Payment

Total (non-disabled) Total (non-disabled)

Blue Collar Blue Collar

White Collar White Collar

Bottom Quartile Bottom Quartile

Top Quartile Top Quartile

Disabled

• RP-2014 has 11 Tables by gender

6

Impact of life expectancy

• Men aged 65 this year can expect to live 2 full years longer to 86.6, compared with 84.6 in 2000

• Women currently 65 saw longevity increase 2.4 years to age 88.8 from age 86.4 in 2000

• Notable that men’s life expectancy was closing the gap in 2000, but this new research has women pulling further ahead

7

Improvement Scale

• MP-2014 Mortality Improvement Scale anticipates increased improvement in life expectancy over prior projections (either projection scale AA or BB)

• Introduction of 2D mortality improvement on large scale

• MP-2014 Mortality Improvement Scale is based on

– Age

– Year of birth

• Historical data converges into a long-term average

• Projecting improvement is always a debatable topic

8

Impact

Plan Characteristics Current Mortality Percentage Increase

All male PPA Mortality 7%

Heavily female PPA Mortality 9%

More female RP-2000 with Scale BB 5%

More female RP-2000 with Scale AA to 2015 10%

Heavily female RP-2000 Generational with Scale AA 6%

Heavily male RP-2000 Blue Collar with Scale BB 9%

9

Disability Table

• Significant change to disability mortality

– In previous tables, guidance was that disability mortality should not be projected

– With RP-2014 Disability Table, we are now instructed to project disabled mortality

– Double whammy has very significant increases (thankfully on a smaller portion of the total liability)

Age Female Male

45 5.2% 15.7%

55 9.5% 20.0%

65 12.4% 23.0%

75 11.8% 23.6%

85 7.5% 13.2%

• Percentage Increase in Annuity Value moving from RP-2000

Disability (no proj.) to RP-2014 Disability (with proj.)

Source: Society of Actuaries

10

Don’t forget OPEB

• For retiree medical plans, the same issues exist

• If the retiree medical plan assumes the medical inflation risk, or shares in the risk with participants, impact will be even higher than for pension plans

11

Big Difference from RP-2000

• No “combined” healthy annuity table

• 417(e)(3) (e.g. lump sum mortality) based on a combined table

• How will this impact lump sums? Will it delay implementation? Will IRS create their own table?

12

Reaction

• Varying levels of feedback from the audit community

– Some may be insistent

– Others will simply look for documentation for support of decision

• Opinion of some actuarial firms

– Not enamored

13

Popularity

• Informal polls have shown that less than 50% of plan sponsors intend to adopt the new tables for upcoming year-end reporting

• Low discount rates compounding issue

– Extending life expectancy more expensive in low interest rate environment

– Significant drop in discount rates upcoming at 12/31/14 from 12/31/13 already is going to spike liabilities

14

From the report

• “As of their release date, the RP-2014 tables presented in this report represent the most current and complete benchmarks of U.S. private pension plan mortality experience, and the Committee recommends consideration of their use for the measurement of private pension plan obligations, effective immediately. (Emphasis added) -- 2014 Society of Actuaries RP-2014 Mortality Tables Report

15

From the Report

• “The Committee also recommends generational projection of mortality rates using Scale MP-2014, or an appropriately parameterized version of the RPEC_2014 model.”

16

Professional Standards

• 3.3.5 of ASOP 35

• A. It is appropriate for the purpose of the measurement;

• B. It reflects the actuary’s professional judgment;

• C. It takes into account historical and current demographic data that is relevant as of the measurement date

• D. It reflects the actuary’s estimate of future experience, the actuary’s observation of the estimates inherent in market data (if any), or a combination thereof; and

• E. It has no significant bias

17

What considerations to adopt (or not)?

• Plan provisions– Lump sum mortality is not being affected (for now at least)

– Impact much less on cash balance plans as benefit is hypothetical account balance and not life annuity

• Type of population– New mortality table has bigger impact for heavily female

workforce

– Union plans may consider the Blue Collar table

• Experience– Has the plan been generating mortality gains or losses the

past few years

– Caution that few plans are sufficiently large to be truly credible

18

What considerations to adopt (or not)?

• Length of time since last review of assumptions

– A number of plan sponsors moved to RP-2000 with Scale BB as soon as last year

– If accounting assumption is same as table for funding purposes, probably make switch when IRS does

– Would auditor allow move to the current funding mortality assumption?

• Simplification?

– With generational mortality, auditors no longer need to question if the projection period is sufficient

– Won’t update mortality table again until next generation (10+ years from now)

19

Questions

• Webinar recording will be available on Thursday,

www.findleydavies.com

• Matthew Klein, FSA, EA, mklein@findleydavies.com, 216.875.1938

Thank you!