When it comes to estimating defined benefit (“DB”) plan costs, it is critical to use inputs and assumptions that make sense. Longevity is one such important factor that demands attention. Getting good answers to questions about life span differences among age, income and health cohorts is necessary for decision-makers. The assessment of how to redesign a plan, transfer risk and/or modify investment strategy depends on knowing what variables determine the size of the liability.
Studies such as the one just released by the National Association of Pension Funds (“NAPF”) and Club Vita (a Hymans Robertson Company) can be helpful to the extent that they shed light about how long participant groups are expected to live. In a November 27, 2014 joint announcement, its “unique” research is described as likely to result in companies having to report higher pension liabilities. Based on an assessment of data about 2.5 million pensioners and one million deaths, authors conclude that “the pace of longevity increases varies significantly within DB schemes and for different groups of DB pension scheme members.” One inference is that the life span gap between men and women in the “hard pressed” economic category versus those who are “comfortable” is narrowing. A second finding is that a typical defined benefit plan liability is likely to rise by one percent.
As the researchers correctly point out, access to granular details about the sensitivity of the cost-demographic lever can be utilized by DB plan trustees when deciding if and how to restructure via a buy-out, liability-driven investing strategy or something else. Click to read “The NAPF Longevity Model” (November 2014).
