26 April 2017

Rising U.S. Life Spans Spell Likely Pain for Pension Funds

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New mortality estimates released Monday by the nonprofit Society of Actuaries show the average 65-year-old U.S. woman is expected to live 88.8 years, up from 86.4 in 2000. Men age 65 are expected to live 86.6 years, up from 84.6 in 2000. Longer lives for retirees may add to a squeeze at many pension funds already struggling to plug funding gaps and force companies to contribute more to cover future obligations. The estimates also are expected to accelerate a shift away from defined-benefit pension plans that offer guaranteed payouts, said Rick Jones, senior partner at consultant Aon Hewitt.

More companies are moving workers into defined-contribution plans, such as a 401(k), where employees are largely responsible for saving and investment choices. The new estimates released Monday—based on data from corporate pension plans—could eventually increase retirement liabilities by roughly 7% for most corporate plans, according to Aon Hewitt. The Society of Actuaries predicts the increases could range from 4% to 8%.

Corporations have roughly $3 trillion in current retirement liabilities. Companies being hit with rising insurance premiums and longer-living retirees also are expected to unload the risks of running a pension plan by offering workers lump-sum pension buyouts or selling those liabilities to insurance companies.

One such deal came in September, when Motorola Solutions Inc. agreed to transfer about $3.1 billion in pension obligations and their risk to Prudential Financial Inc., and to purchase a group annuity contract from the insurer. That and other related moves are expected to roughly halve Motorola’s retirement obligations. General Motors Co. and Verizon Communications Inc. have struck similar arrangements, which worry some retirees, because their benefits no longer carry a backstop from the federal Pension Benefit Guaranty Corp.

Many corporate auditors rely on the mortality predictions from the Schaumburg, Ill., nonprofit organization, which represents 25,000 actuaries around the U.S., as a starting point when calculating how long retirees will live and how much it will cost to cover a company’s retirement obligations.

The last time that the Society of Actuaries released its life-expectancy predictions was 2000. The Internal Revenue Service, which sets minimum funding calculations for corporate pension plans, is expected to consider the new estimates starting in 2016. The society also is considering a set of separate calculations for public pension plans.

Life expectancy for men and women is on the rise because fewer are smoking and there is better medical treatment. The actuarial group’s figures differ from other mortality estimates.

The Centers for Disease Control and Prevention said this month that the average 65-year-old man would live to be 82.9 years old, while the average 65-year-old woman would live to be 85.5 years old. The life expectancy from birth for the total U.S. population was 78.8 years old, the agency said.  The CDC figures were based on death rates from 2012.

Click here to access the full article on The Wall Street Journal. 

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