Recently, there has been a great deal of press coverage of the latest federal government report on longevity in the U.S. The report from the National Center for Health Statistics (NCHS) noted that 2016 was the second consecutive year of overall decline in life expectancy at birth.1 That finding was newsworthy because it represents a reversal of a multi-decade pattern of improved life expectancy.2
The headline-grabbing finding can be misleading for pension plan sponsors. Here’s why: Despite the decline in life expectancy at birth, life expectancy is still improving for those who have reached (or will reach) retirement age.
This issue of Ideas draws attention to the latest age-related longevity data and the implications for pension plans. It also addresses how mortality projections for multiemployer plans are determined.
For professionals who study population statistics, like actuaries and demographers, there are subtle but significant differences between life expectancy, longevity, life span and mortality. Life expectancy is the result of a calculation that estimates the average number of years until death at a specific age. Longevity and life span are less specific. They refer to an estimate of how long an individual might live. The mortality rate is a ratio of the actual number of deaths to the size of the total population for a specific age or age group. Despite these differences, the media tends to use the terms interchangeably to refer to the estimated number of years until death.
Between 2015 and 2016, death rates increased significantly for the under-45 age groups studied. In contrast, death rates decreased for the post-65 retirement-age groups. These findings are illustrated in the graph below.
Changes in Death Rates Between 2015 and 2016 by Age Group
Source: Kenneth D. Kochanek, M.A., Sherry L. Murphy, B.S., Jiaquan Xu, M.D. and Elizabeth Arias, Ph.D. “Mortality in the United States, 2016.” NCHS Data Brief No. 293 (December 2017)
A subsequent analysis by the Society of Actuaries (SOA) released on January 11, 2018 confirmed that, while the expected life expectancy for a newborn decreased based on the NCHS study, the overall age-adjusted mortality rate in the U.S. improved (by less than 1 percent).3
Shorter life expectancy (higher mortality) translates into reduced costs for pension plans. Knowing that, it can be tempting to conclude that the latest NCHS data being widely reported is good news for pension plan costs and may suggest that a change in mortality improvement assumptions would be timely.
In fact, the recent mortality rates observed for the retired population continue to support expected improvements in life expectancyfor this group. Therefore, it is important for actuaries of multiemployer plans not to reverse their expectations for mortality improvement in response to the latest data. As additional experience emerges, there may be refinements necessary in the actuaries’ assumptions for pension plans, but they should be based on longer-term trends.
The SOA issues mortality tables and mortality improvement scales. In recent years, it has published annual updates to the mortality improvement scale.
By law, funding for single-employer pension plans is based on mandated SOA tables and projection scales, which were recently updated and will tend to increase plan costs. Those tables and scales are based on mortality data for private sector (white and blue collar) workers. However, none of those tables adequately reflect the mortality experience of multiemployer plan workers. A Segal Consulting study of the mortality experience of its multiemployer pension clients found that mortality incidence observed for multiemployer plan participants was greater than projected by the SOA rates in its most recent RP-2014 Blue Collar Annuitant Mortality Tables.*
Analyses like this explain why actuaries for multiemployer plans often develop custom, plan-specific approaches to selecting mortality tables, though a standard mortality improvement scale is generally used to project the selected table into the future.
* The Multiemployer Pension Plan Mortality Study, which used actual mortality experience from 2008 through 2013 from 271 plans, representing nearly 200,000 deaths that occurred during that period, is available on Segal’s website. (Select Data under the Publications & Videos tab.)
The 2016 longevity data from the NCHS will probably have some impact on the next annual SOA update (MP-2018), which is due out in the fall.
We should be cautious of generalizing too much from one year of data given that there is a lot of year-to-year volatility. According to the SOA’s MP-2016 report:
Continuing to focus on the 50–95 age grouping, the average annual age-adjusted mortality improvement rate from 2000 through 2009 was 1.93% for males and 1.46% for females. The corresponding rates for the period 2010 through 2014 dropped to 0.60% and 0.42%, respectively.
There has indeed been a trend of lower improvement over the last several years even at the older ages, but we should be cautious about setting long-term assumptions based on shorter-term trends — even when those trends last a decade.
It is too soon to tell whether longevity for the retired population will continue to improve at high rates. A recent paper published by the Center for Retirement Research at Boston College4 concluded.
The key debate for long-range projections hinges on whether the future will mirror the past, with mortality rates of improvement fluctuating around the long-term rate of about 1 percent per year, or whether the big gains are behind us, with mortality improving less rapidly in the future.
For more information about latest age-related longevity data and the implications for pension plans, contact your Segal benefits consultant, the nearest Segal office or one of the following experts:
1 Kenneth D. Kochanek, M.A., Sherry L. Murphy, B.S., Jiaquan Xu, M.D. and Elizabeth Arias, Ph.D. “Mortality in the United States, 2016.” NCHS Data Brief No. 293 (December 2017).
3 That analysis, US Population Mortality Observations – Updated with 2016 Experience, took into account 2016 mortality data released in October 2017 by the Centers for Disease Control and Prevention, as well as prior mortality experience data from 1999 through 2015.
4 Anqi Chen, Alicia H. Munnell and Geoffrey T. Sanzenbacher, “What’s Happening to U.S. Mortality Rates?” Center for Retirement Research at Boston College, Number 17-17 (September 2017).
This Ideas is part of a series of publications, videos and other resources on Managing Retirement Plan Risk.
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