New mortality tables issued
On October 27, 2014, the Society of Actuaries (SOA) issued updated versions of its mortality tables to help retirement plan sponsors more accurately estimate the financial obligations associated with their plans. The updated tables, which show that longevity in the U.S. is increasing, establish a new benchmark for mortality rates of private pension plan participants in the U.S. The SOA is the largest professional association of actuaries in the U.S. and periodically conducts a comprehensive review of available mortality data and publishes mortality tables and improvement scales. The SOA’s last comprehensive study was in 2000.
The new mortality tables reflect increasing life expectancies in the United States, along with an expectation that the trend will continue. The SOA has issued base mortality tables (referred to as RP-2014) and a mortality improvement scale (referred to as MP-2014) that is used to address the anticipated rate of improvement in life expectancy in future periods. Many plan sponsors use the published SOA mortality tables as a basis for making an assumption about mortality. The new mortality tables are expected to meaningfully increase benefit obligations for many defined benefit plans.
How will these new tables affect defined benefit plan financial statements for 2014?
The question has been raised as to how and when plan sponsors should consider these new mortality tables in their defined benefit plan financial statements (most entities have already addressed this at the plan sponsor’s financial statement level).
The measurement of benefit plan obligations and related costs for defined benefit pension and postretirement benefit plans requires an estimate of mortality of the plan’s participants. U.S. GAAP requires plan sponsors to select a mortality assumption that reflects the “best estimate” of the plan’s future experience that considers all information as of the current measurement date. However, it should be noted that when making this estimate, U.S. GAAP requires that all available information through the date the financial statements are available to be issued should be evaluated to determine if the information provides additional evidence about conditions that existed at the balance sheet date.
Because the updated mortality tables take into account historical trends and data that go back a number of years, the issuance date of the mortality tables should not affect the evaluation of whether or not the new mortality tables should be used for 2014 financial statements. Rather plan sponsors should understand and evaluate the reasonableness of the mortality assumption selected as of the date the financial statements are available to be issued.
While U.S. GAAP does not prescribe the use of a specific mortality table or mortality improvement scale, given the widespread use and acceptance of the SOA mortality tables, there is an expectation that these tables will be used as a basis for developing mortality assumptions for most plans beginning in 2014, even if beginning of year actuarial information is presented, and regardless of the tables used for funding purposes.
Plan sponsors should review the actuarial valuation report (performed for compliance with ASC 960) to determine if the new mortality tables were considered in developing the mortality assumption. If other tables or plan-specific data were used to develop the mortality assumption, credible information or rationale must be available and should be well documented to support the alternate approach, including evidence supporting why the alternate approach best reflects the mortality experience and demographics of the plan. This information should also include consideration of changing trends in future life expectancies.
The AICPA recently issued Technical Questions and Answers (“Q&A”) Section 3700.01, “Effect of New Mortality Tables on Nongovernmental Employee Benefit Plans (EBPs) and Nongovernmental Entities That Sponsor EBPs,” which provides guidance on the application of the accounting and auditing standards related to the use of the new mortality tables.
While the AICPA Q&A is not a source of established authoritative accounting principles as described in the FASB Accounting Standards Codification, it does provide guidance on how the applicable professional standards apply to various situations.
The newly issued mortality tables should be considered by all plan sponsors in preparing 2014 financial statements for defined benefit plans, including situations where beginning of year actuarial valuation information is presented. This is consistent with requirements in the accounting standards to consider all available information up through the date the financial statements are available to be issued in developing accounting estimates.