An opportunity to fine-tune your approach to pension risk management.
As a financial advisor addressing Plan Sponsors of Defined Benefit (DB) pension plans, I want to bring to your attention the latest update from the IRS that will surely have significant implications for our pension funding strategies.
The IRS has released the 2024 mortality tables, which will be instrumental in funding, determining minimum lump-sum distributions, and various other calculations that affect the financial health of your pension plan. This update marks the first major revision to the base mortality rates since 2018 and includes adjustments to consider the impact of COVID-19.
The updated mortality tables provided under Internal Revenue Code (IRC) Section 430 are not just a regulatory requirement; they are a vital component in ensuring that your plan remains adequately funded, reflecting true longevity expectations. The adoption of the Pri-2012 base mortality rates, as suggested by the Society of Actuaries, and the modification of the mortality projection scale to include a COVID-19 adjustment, will likely result in a modest reduction in the plan’s actuarial liabilities.
It’s crucial to note that this adjustment pauses mortality improvement for the years 2020 through 2023 to better align with the pandemic’s impact.
Moreover, the final rule introduces a cap on the annual mortality improvement rates, which must not exceed 0.78% for any age post-valuation date, as mandated by the SECURE 2.0 Act.
This will affect the projection of liabilities and the cost of providing benefits.
It is essential to understand that the IRS’s shift to generational mortality tables, which apply different factors for each birth year, will require some changes in the way we have been calculating and projecting liabilities. However, for smaller plans, the IRS has maintained the option to use static tables.
For nonbinary participants, the IRS is showing inclusivity by allowing for a “reasonable approach” in liability determinations, signaling a move towards more personalized and potentially more equitable pension calculations.
Your Plan’s Liabilities
Now, let’s discuss the impact of these new tables on your plan’s liabilities and lump-sum distributions. With the update, we can expect to see a reduction in liabilities by approximately 1% to 1.5% for typical plans. Similarly, the updated tables will generally result in lower minimum lump sums, especially for traditional plans with lump sums equating the present value of benefits deferred to age 65.
Importantly, for those of you utilizing plan-specific mortality tables based on your plan’s experience, the IRS will allow continued reliance on these tables for 2024. This grants a level of continuity and stability in your funding strategies for the immediate future. However, looking ahead, the IRS has signaled a proposal that might require adjustments to the use of substitute mortality tables post-2024, particularly accounting for significant changes in plan coverage.
Furthermore, a proposal under consideration could impact how plan-specific mortality is assessed concerning COVID-19. The goal here is to ensure that mortality tables remain predictive of future experience, taking into account the unique mortality experiences of the plan during the pandemic years. If you feel your plan’s experience deviates from the norm, this would be a crucial time to assess and potentially comment on the proposal.
In summary, it is imperative that we carefully examine these changes and adjust our actuarial assumptions accordingly. The IRS’s recent moves underscore the importance of adaptability and the need for robust actuarial analysis. As we move forward, I recommend we work closely with our actuarial team to reassess our funding strategies, ensuring that our pension promises remain both manageable and secure in light of evolving mortality trends.
Remember, these are not just regulatory changes; they represent an opportunity to fine-tune our approach to pension risk management. Let’s leverage these updates to enhance the long-term security of our pension promises. Please do not hesitate to reach out to discuss how these changes directly impact your specific plan.
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