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Regulation and Compliance > Federal Regulation > IRS

Actuaries Ask IRS To Leave Out Worker Collars

By Allison Bell

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NU Online News Service, Feb. 27, 2004, 5:57 p.m. EST – An actuarial group says employers would have a hard time using factors such as tobacco use and “collar status” in retirement plan liability calculations.[@@]

The Internal Revenue Service should stick with an official pension calculation mortality table that relies on the workers’ age and gender as the sole variables, according to a comment letter by the American Society of Pension Actuaries, Arlington, Va.

Ed Burrows, co-chair of the society’s actuarial resource group, and 5 other society leaders signed the letter.

The society actuaries were responding to an IRS proposal that calls for the IRS to ask defined benefit plan sponsors to use more sophisticated worker and retiree mortality projections in pension liability calculations.

The IRS could end up requiring sponsors’ actuaries to consider whether workers smoke, whether they have blue-collar or white-collar jobs, and how high their incomes are, on the assumption that low-income, blue-collar smokers will have shorter life expectancies and lower pension needs than high-income, white-collar non-smokers will have.

The IRS also is considering the possibility of asking actuaries to incorporate “generational” mortality factors, or adjustments to account for the possibility that workers born in later years might have longer life expectancies than workers born in earlier years.

The pension actuaries society believes that use of “generational mortality” is too complicated and might not do much to increase the accuracy of actuarial valuations, Burrows and his colleagues write in the society’s letter.

Burrows and his colleagues also argue that the IRS should take a more comprehensive approach to updating pension liability calculation methods.

Focusing solely on mortality tables is a bad idea, because changes in interest rates and other factors tend to have a far bigger effect on pension liabilities, Burrows and his colleagues write.

But including factors such as whether workers are blue-collar workers or white-collar workers in liability calculations would be especially difficult, Burrows and his colleagues write.

For one thing, the pension actuaries write, even if employers and their actuaries could get accurate information about matters such as whether workers smoke, the status of a pension plan participant could change. A young, low-paid, blue-collar smoker might grow up to become a high-paid, white-collar non-smoker.

Second, the actuaries write, in some cases, applying mortality table variables could lead to questionable results. The actuaries note that a union member could be classified as a blue-collar worker while an otherwise identical, non-union worker could be classified as a white-collar worker.

Finally, the actuaries write, “some choices could be socially unacceptable.”

The actuaries point out that employers could end up having to make bigger contributions for a plan that covers white-collar workers, who have longer life expectancies, and smaller contributions for a plan that covers blue-collar workers, who have shorter life expectancies.

“This coincidental greater funding for plans of different socioeconomic class could easily be considered to be socially inappropriate,” the actuaries write.

Letting plan sponsors decide which social factors to use would be even worse, because the typical plan actuary would select the options that would get the plan sponsor the best results, the actuaries predict.

The IRS bulletin about the proposed mortality table update is at http://www.irs.gov/irb/2003-38_IRB/ar14.html

The ASPA comment letter is at http://www.aspa.org/archivepages/gac/2004/2004-02-25-mortality.htm

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