Mortality Improvement Scale MP-2016: Key Implications for Employee Benefit Plan Sponsors [Blog Post]

The following SC&H Group blog post discusses Mortality Improvement Scale MP-2016, which was recently issued by the Retirement Plans Experience Committee (RPEC) of the Society of Actuaries (SOA). The post addresses trends reflected in the Scale MP-2016 and its impact on the financial obligations of employee benefit plan sponsors.

 In today’s volatile economic and regulatory environment, employee benefit plan sponsors must proactively minimize risk to ensure a sound, sustainable plan. A key component of this effort is ensuring that benefit liabilities are calculated using the most current assumptions about participant mortality, such as those highlighted in the newly released Mortality Improvement Scale MP-2016.

By updating from Scale MP-2015 to Scale MP-2016, plan obligations may decrease. In fact, preliminary SOA estimates have found that updating may reduce a plan’s liabilities by 1.5 to 2 percent, depending on the plan’s characteristics.

The Data: Key Trends Reflected in Scale MP-2016

Released by the RPEC on October 20, 2016, Scale MP-2016 includes three additional years (2012-2014) of historical U.S. population mortality data, as well as the modification of two input values designed to improve the model’s year-over-year financial stability.

Overall, the data reflected in Scale MP-2016 highlights three key mortality trends: (1) people are living longer, but (2) longevity is increasing at a slower rate than in previous years, and (3) the year-over-year mortality improvement rates are highly volatile.

In fact, while the average annual improvement in mortality rate for both genders has been nearly 1 percent since 1950, Scale MP-2016 indicates a slight decline in life expectancy due to the slower average rate of mortality improvement. For example, following is life expectancy data for 65-year-old males and females under Scales MP-2016 and MP-2015.

  • Males
    • Scale MP-2016: 85.8 years
    • Scale MP-2015: 86.2 years
  • Females
    • Scale MP-2016: 87.8 years
    • Scale MP-2015: 88.2 years

This slowing of mortality improvement rates has been occurring for nearly two decades, as illustrated by the fact that Scale MP-2014 rates are even lower than Scale MP-2015 rates. For instance, from 2000 to 2009, the average annual age-adjusted mortality improvement rate for people ages 50 to 95 was 1.93 percent for males and 1.46 for females, while the corresponding rates from 2010 to 2014 were 0.60 and 0.42 percent, respectively.

Determining the Effects of Scale MP-2016 on Your Plan

While significant year-over-year fluctuations pose a challenge to those trying to model future patterns, the RPEC has attempted to smooth them in a way that puts only a moderate level of emphasis on the most recent history.

Thus, the updated scale may only slightly—not significantly—decrease pension plan obligations. Since a plan’s obligations to beneficiaries are estimated by applying assumed mortality rates to the plan’s census of beneficiaries, plans can use Scale MP-2016 to help make forward mortality assumptions in the valuation of payment obligations.

According to an analysis by the AICPA’s Employee Benefit Plan Audit Quality Center (EBPAQC), Scale MP-2016 did not affect the 2015 benefit obligations of plans filed by the Form 5500 extended filing deadline (October 17, 2016). However, plan sponsors with balance sheets dated before October 20, 2016 need to evaluate the possible impact of Scale MP-2016 on their plan’s financial statements.

In addition, plans that present obligations as of the beginning of year, as permitted by ASC 960, need to consider the potential effect that Scale MP-2016 may have on their benefit obligations.

For instance, while the obligation measurement dates fall before the balance sheet date, the assumptions used to estimate plan obligations must be evaluated based on all available information—through the date financial statements are available to be issued. This includes determining whether updated mortality conditions existed as of the date the obligation is presented in the financial statements.

The Path Forward

Given the significant economic and regulatory pressures put on plan sponsors, it is important that they can justify the business reasons for retaining plan risk and volatility, as well as its effect company performance.

To do this, they must be able to perform calculations on the impact of mortality rates on their plan. This is essential for determining whether and when to transfer risk by offering lump sums to participants, how to communicate with participants about offers, how to consider factors such as changing interest rates in calculating lump sums, and a host of other key tasks.

Therefore, plans and plan sponsors should consult Technical Questions and Answers regarding the effect of new mortality tables. Issued by the AICPA, this non-authoritative guidance addresses the use of mortality assumptions in estimating benefit obligations for financial reporting purposes. Plan sponsors should particularly note the AICPA’s emphasis on considering information that becomes available after the financial statement date but prior to the date the financial statements are available to be issued.

In addition, plan sponsors should work with their plan actuaries to determine how to integrate emerging mortality improvement data into their plan valuations and ensure adequate plan governance and reporting for full compliance and assurance.

Ultimately, by accurately measuring pension obligations and delivering effective plan fiduciary management, plan sponsors can minimize risk and best position their plan for long-term success.

Do you know how to navigate the changing IRS regulations regarding employee benefit plans? Be sure to read our “Top 10 Issues Affecting Employee Benefit Plans” white paper.

Contact SC&H Group’s Employee Benefit Plan Audit Services team here to learn more about employee benefit plan regulations, standards, and best practices for establishing effective controls and ensuring timely completion of plan audits.