Pension plan longevity set to jump with new actuarial mortality tables

The longevity risk exposure and liabilities of many defined benefit pension plans are set to jump once a new set of actuarial mortality tables are introduced during 2016, according to a consultancy.

The new set of mortality tables could result in an increase in liabilities of between 3% and 8% for most defined benefit pension plans, according to a report from Wilshire Consulting. Pensions & Investments reports that the tables from the Society of Actuaries were released in draft form in February and only now is the impact becoming better understood as firms and pension plans have time to assess the impacts.

The mortality tables reflect an increase in life expectancy of Americans, resulting in an increase to U.S. pension plan liability values and durations and ultimately longevity risk as the pension plans will be paying out for longer.

The increase in liabilities for women aged between 25 to 85 is in a range from 5.5% to 10.5%, for males of the same age group the increase is between 2.5% to 17.4%.

At the moment, pension plans in the U.S. tend to use mortality tables which were published back in 2000. The updated set, which are expected to come into use in 2016, will make a big difference to the expected liabilities of U.S. pension plans as the increased longevity of their plan participants will result in the need to pay out more.

As life expectancies increase so does pension plans longevity exposure. The jump that the adoption of these new actuarial mortality tables will cause may spur on longevity hedging, through longevity reinsurance, swaps and risk transfer in the U.S. in years to come.

Currently, the U.S. has lagged behind the UK and Europe in large longevity risk transfer and longevity swap deals, but an increase in expected liabilities of this size could be just the stimulus the U.S. pension plan market needs to look more seriously at reinsurance for offloading longevity liabilities.