New mortality tables to add $100Bn to U.S. pension obligations: Moody’s

Rating agency Moody’s warns that the impending release of new actuarial mortality tables, due by 31st October, could trigger a raft of pension risk transfer deals as the new mortality assumptions may add $100 billion to U.S. pension benefit obligations.

In an article regarding a recent pension risk transfer deal which saw Motorola transfer its full pension obligations for a number of its beneficiaries, Moody’s explains that by completing this restructuring of its pension plan in 2014 the ratings agency sees it as a credit positive.

Had Motorola waited until 2015, after the new mortality tables had been released, its pension obligations may have jumped significantly so the transaction could have cost it a lot more to complete.

Moody’s says that it expects the introduction of the new mortality tables to add as much as $100 billion to pension benefit obligations of its rating universe of non-financial issuers, which it says is credit negative as the firms will have to pay down the increase over seven years.

Waiting until 2015 to transact the pension risk transfer would have caused Motorola to change its mortality assumptions, resulting in larger lump sum offers for retirees and higher pension payment forecasts. Moody’s says that most actuaries expect the new mortality tables will add between 3% and 8% to pension benefit obligations, with some actuaries even predicting increases up to 10%.

In fact, for some specific groups the increase in liabilities could be even higher, depending on age, gender and other factors, as we’ve written before. The result is going to be an increase in pension plan longevity shortfalls and risk, which could result in more emphasis on pension risk transfer, restructuring and even longevity hedging in the U.S.

Moody’s says that it expects to see more announcement for similar deals to Motorola, which saw the firm transfer its entire obligations for a group of pensioners to Prudential at agreed benefit rates and terms. In this way it’s not strictly a longevity risk transfer as we normally cover, as pension benefit obligations were agreed prior to the transaction, but had Motorola waited it could have faced higher estimates so in effect it has hedged some longevity risk for the firm.

Once we see an increase in longevity assumptions for pension funds in the U.S. it could stimulate the longevity risk transfer market in the country, which has so far been very slow. While some pension funds might look to offload the full responsibility for their pension payments, as Motorola did, others may look to longevity insurance, reinsurance or longevity swaps to offload the increase in mortality assumptions while holding onto responsibility for the pension obligations.