IRS Decision May Save Pension Plans $18 Billion

The Internal Revenue Service's decision not to update mortality assumptions to reflect today's higher life expectancy could help corporate pension plan sponsors save at least $18 billion in 2016 as they continue to calculate minimum funding contributions according to outdated models.

A new report from Moody's Investors Service noted that market participants had widely expected the IRS to adopt the new mortality tables issued by the Society of Actuaries in 2014, which would increase sponsors' projected benefit obligations between 4 to 8 percent, or approximately $126 billion. However, the IRS plans to continue to use its current assumptions until 2017 as it evaluates the new tables.

The decision will also benefit sponsors by lowering the cost of the lump sum buyouts offered to plan participants, which sponsors also calculate using the IRS's mortality assumptions.

“Delaying adoption of the new tables makes buyouts cheaper than we had expected,” said Moody’s vice president and senior accounting analyst Wesley Smyth in a statement. “And while continuing to use these 15-year-old assumptions will increase liquidity for plan sponsors now, it is just delaying the inevitable adjustment. People are living longer, and the IRS will eventually have to adjust funding requirements to reflect that.”