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Americans are living longer, and that may not be good news for those states facing large unfunded pension liabilities. Adding years to the average life span can have a significant impact on a pension plan’s funding ratio. For the first time since 2008, this past December the IRS released new actuarial tables accompanied by additional requirements for private pension managers. These new tables require corporate pension plans to adopt new, more accurate and realistic, mortality assumptions. Unfortunately, these regulations do not apply to state and local public pensions. As such, public pension plans continue to bury their heads in the sand living in a time warp of decades-old actuarial assumptions.
The mortality tables recently released by the IRS, the RP-2014 tables, were developed in 2014 by the Society of Actuaries (SOA). The good news is that the updated tables report lower mortality rates, meaning that retirees are expected to live longer than ever before. However, they also pose new challenges to pension fund managers. Longer lives means longer retirements and longer retirements mean more pension payments, which will require plans to retain higher levels of funding. It has been estimated that the funding targets for pension plans could increase by up to 5% with the new (2014) assumptions.
Many states still use earlier versions that underestimate longevity, and thus give a false estimate of unfunded liabilities. An exception is Vermont. They recently updated their mortality assumptions for a 2017 re-valuation. After doing so, Vermont saw its unfunded liabilities rise by almost $10 million. Similarly, when the California Legislators’ Retirement System updated their mortality assumptions, its unfunded liabilities rose by over $7.5 billion. Finally, when the state of New York updated its mortality assumptions in 2015 to match the SOA’s MP-2014 scale, the switch forced New York to increase its annual contribution rates for two pension funds by about 4%.
Public pension fund managers, trustees, and state legislatures, should embrace these tables and use them as a wakeup call to take more seriously their fiduciary responsibility, and better manage the systems with which they are entrusted. Fiduciary responsibility requires the “highest standard of care.” Being an elected or appointed official requires prudent management of taxpayer dollars and those of the men and women who labor to protect us and serve our states and communities. Calculating unfunded liabilities based on accurate-market driven assumptions, rather than old ones that hide from the public the true liabilities, is essential to public pension fund integrity.