New Mortality Improvement Scale Could Reduce Pension Obligations

The Society of Actuaries (SOA) released its annually-updated  mortality improvement scale for pension plans, MP-2016, incorporating three additional years of Social Security Administration (SSA) data on U.S. population mortality.

The updated improvement scale suggests U.S. mortality continues to improve, but at a slower average rate of improvement than previous years, which may decrease pension plan obligations slightly.

MP-2016 incorporates SSA mortality data from 2012 to 2014 and a slight modification of two input values designed to improve the model’s year-over-year stability. The updated improvement scale indicates a slight decline in life expectancy as a result of the slower average rate of mortality improvement. For example, the life expectancy for a 65-year-old male declined to 85.8 years under the MP-2016 scale, compared to 86.2 years using the MP-2015 scale. Additionally, the life expectancy for a 65-year-old female is now 87.8 years under MP-2016, compared to 88.2 years based on the previous MP-2015 scale.

The updated scale can be used by pension plans to assist in making forward mortality assumptions in the valuation of pension payment obligations. Based on the SOA’s preliminary estimates, MP-2016 may reduce a pension plan’s current liabilities by 1.5% to 2%, depending on the individual characteristics of the plan.

“By releasing MP-2016, we are building on our commitment to regularly update the mortality improvement scale as new data becomes available,” says Dale Hall, managing director of research for the SOA. “The updated scale provides the latest information to help accurately measure pension obligations. However, it is up to pension plan sponsors, working with their plan actuaries, to determine how to incorporate emerging mortality improvement data into their plan valuations.”