Defined benefit pension plan sponsors use mortality tables for a variety of purposes, including calculating lump sum distributions and minimum contribution requirements. The IRS mandates the mortality tables that plan sponsors must use when calculating lump sum distributions and minimum contributions obligations.
Currently, plan sponsors must use the RP-2000 mortality table to determine present value lump sum conversions and minimum contributions. The Society of Actuaries (the "SOA") published RP-2000, and it is based on data from over 20 years ago. Given that the RP-2000 data is stale and that the Pension Protection Act of 2006 mandated a review of IRS-required mortality tables every ten years, the SOA, in 2009, began a study to update underlying mortality assumptions.
In February 2014, the SOA released "exposure drafts" of a new mortality table, RP-2014, and a new mortality improvement scale. RP-2014 contained a new table for disabled life mortality, and separate tables for white collar and blue collar participants. As expected, RP-2014 reflects longer life expectancies. The SOA has asked the actuarial community to submit comments on RP-2014 on or before May 31, 2014. After reviewing these comments, the SOA will issue a final report containing the RP-2014 and the new mortality improvement scale.
IRS Notice 2013-49 contains the mortality tables that plan sponsors must use for the 2014 and 2015 valuation years. These tables are predicated on RP-2000. IRS is expected to require plan sponsors to begin using RP-2014 for the 2016 valuation year. For accounting purposes, however, plan sponsors may elect to adopt RP-2014 earlier to determine pension liabilities.
While the final content of RP-2014 is unknown,the following is certain: in application, RP-2014, which reflects longer life expectancies, will produce larger pension liabilities and increase the cost of lump sum distributions and plan contribution obligations. RP-2014 will also affect defined contribution plans, as annuities purchased with account balances will cost more and provide lower monthly benefits.
In view of the imminent release of RP-2014, plan sponsors are advised to consult with their ERISA counsel and actuaries to formulate strategies to manage the increased pension plan liabilities and contribution obligations that will result.