We’re Living Longer — Get Ready to Pay for It

ERISA attorney Marcia Wagner says increased life expectancy raises financial risks for clients, requires careful planning

Life expectancies for 65-year-old men and women rose more than 10% since 2000. Life expectancies for 65-year-old men and women rose more than 10% since 2000.

Attention advisors: A mostly unheralded change in actuarial tables suggests the need to plan for longer retirements for your clients and could also make a delay in claiming benefits advantageous for some clients.

That is the upshot of a recent client communication from ERISA attorney Marcia Wagner of the Wagner Law Group.

The Boston-based firm’s February newsletter notes that the Society of Actuaries (SOA) released new mortality tables last October that reflect substantially increased longevity for 65-year-olds in comparison with SOA’s year 2000 tables and adjustments that have been used by defined benefit pension plans to date.

The new tables show a 10.4% life expectancy increase for 65-year-old men (compared with 2000), from 19.6 years to 21.6 years, and an 11.3% improvement for women, from 21.4 years to 23.8 years since SOA’s 2000 tables.

The good news about increased life expectancy at the same time signals an expected increase in the cost of pension annuity payments, Wagner says in her newsletter, citing SOA’s forecast that retirement liabilities will rise from 4% to 8%.

The new mortality assumptions, if their adoption is mandated by the IRS as conventionally assumed, will require plan sponsors to increase plan contributions lest funding ratios fall.

What’s more, use of the new tables — which Wagner expects to go into effect in 2016 (IRS regulations use the old tables in their 2015 calculations) — will necessitate larger lump sums to retirees, which, the ERISA attorney argues, would incentivize plan sponsors to encourage lump-sum payments before the new tables are officially adopted.

From the retiree’s perspective, a financial advisor might have the opposite incentive to encourage delay of annuity benefit claims.

Reached by ThinkAdvisor, Wagner put the emphasis not on increasing benefits but the increased financial risk implied by today’s longer life expectancies.

“Financial advisors should be having frank discussions with their clients regarding ‘longevity risk’ and the resulting need to save even more, spend less, invest wisely and, also, potentially work longer—not just for the resulting increased benefit under defined benefit pension plans, but in order to earn money longer and stave off spending retirement savings,” she said.

In her newsletter, Wagner notes that plan sponsors have been pursuing their own de-risking strategy, mainly by increasing allocation of plan assets to fixed income. But adoption of SOA’s new tables would nevertheless immediately degrade plans’ funded status.

Asked if that is a matter of concern for clients relying on public pensions, Wagner replied: “Yes, this is a concern, particularly for the least well-funded public pension plans, as well as the seriously underfunded multiemployer (union) plans. Solutions? Common sense prevails: Save more, spend less, invest wisely and, if possible, work longer.”

While the new tables would seem set for 2016 adoption, Wagner cautions that the IRS is obligated to publicize proposed rule changes and invite public comment, a process that could delay any rule changes until 2017 or 2018. She notes as well that other actuarial groups, such as the Academy of Actuaries, view SOA’s new tables as overstating life expectancy.

For that reason, Wagner urges advisors to stay abreast of pension plan rule changes that could impact the fortunes of retiring clients.

“From funding to tax-qualification requirements to fiduciary responsibility and liability, the pension landscape is changing and clients rely on their financial advisors for real time and real value assistance in these areas,” she says.

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