Some DB plan sponsors may benefit by as much as 10% by adopting industry-specific mortality assumptions instead of the new Society of Actuaries (SOA) mortality tables, according to a new Mercer study. The recently released SOA tables can have a significant impact on income statement, balance sheet, and cash funding costs related to DB pension plans.
Mercer, in its first-of-a-kind study, analyzed the mortality experience of six industry groupings. The following three have higher mortality rates than the overall new SOA life expectancy assumptions:
· Consumer goods and food and drink – 9.5% higher mortality rates
· Auto, transportation and industrial goods – 7% higher mortality rates
· Basic materials, paper and packaging – 4.5% higher mortality rates
Industries with lower mortality experience than the SOA assumptions, according to Mercer, include Healthcare and Hospitals (4.75% lower mortality rates), as well as Banking, Finance and Insurance (3.25% lower mortality rates). Companies in the Chemicals, Oil & Gas and Utilities Industries showed similar mortality rates to the SOA tables.
“Plan sponsor liabilities under the new SOA tables may increase by 5% to 10% or more depending on the characteristics of the plan and the assumptions currently being used,” said Bruce Cadenhead, Chief Actuary for Mercer’s US Retirement, Risk & Finance business. “Unfunded liabilities on some corporate balance sheets could double or even worse. A number of employers may be able to avoid some or most of that increase.”
Major accounting firms have indicated they would look favorably on industry-specific data that supports realistic mortality assumptions as they relate to participants in their pension plans. Plan sponsors need to justify to their auditors how proposed assumptions are appropriate for their specific circumstances.
“Not all plan sponsors will benefit from adopting industry-specific mortality assumptions,” noted David Weissner, Senior Partner in Mercer’s Retirement business. “But examining how participants’ experience in your plan may vary from the overall SOA assumptions reduces the risk of undervaluing or overvaluing pension liabilities. It enhances the accuracy of estimates of future liabilities and cash flows. Therefore, the plan sponsors have the opportunity to improve the quality of reported earnings.”
A summary of Mercer’s Industry Longevity Experience Study can be found at: http://www.mercer.com/events/webcasts/mercers-longevity-insights-benefits-industry.html
This provides access to a replay of a Webcast conducted by Mercer on the study as well as the PowerPoint used in the Webcast presentation, which provides additional detail on Mercer’s analysis.
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