Nov. 2014

Guess who is assumed to live longer in the U.S. – Most Everyone!

As an investor, communicator and member of society, one of the largest impact news announcements of the year occurred last week, and it came and went almost unnoticed. Just because it sounds boring doesn’t mean it won’t wreak havoc on corporate balance sheets and even worse, state and local treasuries. Most people make fun of actuaries, and assume their data science is not all that important. In this case, it may cost us trillions.

After nearly 15 years of the same assumed mortality data for pension plans, the Society of Actuaries has released a new increase. Pension plans have taken on new liabilities and liquidity requirements. Both men and women are seeing two more years on average of expected life in 2014 in comparison to 2000. Expectations to live have moved to 86.6 from 84.6 and 88.8 from 86.4, respectively (of course women live longer).

But good news of life longevity aside, these additional two years pose major challenges for pension plan liability. The SOA projects liability growth to now run between 4% and 8% for typical pension plans.

Corporations are looking at an extra two years of funding required for defined benefit plans. Public companies with underfunded Pension Plans are in even deeper red, as retirees live longer. Asset managers are seeing unwanted higher risk and lower performance as earnings take haircuts to fund the new liabilities.

The pension industry, so focused on liability-based investing, now has a new twist and turn. Annuity-based lump-sum buyouts just got more expensive (with two extra years to fund), and yet still may be a better option for some corporate balance sheets. As portfolio managers look at stock prices, P/E multiples and a potential series of earnings underperformance, these liabilities need to be addressed and communicated head on. Additionally, asset managers need to consider the performance of the stocks they hold, and the performance requirements of their institutional clients.

These changes are predicted to take effect in early 2016, and plan sponsors will be seeking to make necessary funding, investment, and lump-sum strategic decisions.

Innovation anyone?


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