In our newsletter for the quarter ended January 2022, we had posted about change in post-retirement mortality table used for actuarial valuation of Defined Benefit Pension Scheme and other Post-retirement Benefit Schemes. In continuation to the topic, this article will discuss the impact due to improvements in post-retirement mortality rates.
Post-retirement mortality is an important demographic assumption used for Pension actuarial valuation for accounting purposes as well as for annuity pricing in Insurance sector. New annuitant’s mortality table 2012-15 lead to significant increase in Pension liability; mainly due to reducing mortality rates as compared to the old table. Entities had to take one-time hit in their financials at the time of adopting new table. This can be normalised to some extent by considering improvements in the post-retirement mortality rates, in consultation with Actuary.
Earlier Indian actuaries were mostly using UK’s annuitants’ mortality table referred to as A55 table. Later ‘Indian Individual Annuitant’s Mortality (1996-98)’ was published in 2000 and then around March 2021, revised ‘Indian Individual Annuitant’s Mortality (2012-15)’ was published. Comparison of these three tables based on Mortality Rates (deaths per 1000) at different ages has been shown in the table 1.
Table 1: Comparison of tables based on expected no. of deaths per 1000 people at a given AGE
|Age||A55 (Male, UK)||Old Annuitants 1996-98 (India)||New Annuitants 2012-15 (India)|
To summarize this table, it is expected that mortality rates will reduce further due to improved public health facilities and general awareness towards health & wellness. Also, it is prudent to consider that going forward overall there will be improvements only in mortality assumption with improving medical technologies although in 2020-21, senior citizens’ death cases increased due to Pandemic which may be considered as an anomaly.
For Pension actuarial valuation using improvements in post-retirement mortality table with Setback adjustments, year on year until the revision of new table would help avoid the sudden increase in pension costs in the year of adoption of the new table.
For example- i) 1-year setback adjustment means for a person aged 60 years mortality rate of age 59 will be applicable and for person aged 61 years mortality rate at age 60 will be applicable and so on.
Ii) 2-years setback adjustment means for a person aged 60 years mortality rate of age 58 will be applicable and for person aged 61 years mortality rate at age 59 will be applicable and so on.
Actual impact on pension liability will depend upon various other factors such as employee census and pensioners’ profile covered under the scheme and average age, plan specifications etc. Here we have studied impact on March 2022 Pension liabilities of sample case study for which annuitant’s mortality table 2012-15 was improved with setback adjustments from 1 year up to 5 years: keeping employees/pensioners data and all other assumptions same under each scenario as on 31.03.2022.
Average profile of members of sample case study has been shown in table 2.
Table 2: Average Profile of Members considered
|Average age of Pension Optees (eligible in-service employees)||57 years|
|Average age of existing Regular Pensioners||67 years|
|Average age of existing Family Pensioners||56 years|
In table 3 results of these scenarios based on post-retirement mortality with improvements have been presented, on an average basis.
Table 3: Impact of improvements in post-retirement mortality table
|Mortality table Setback by the number of years||Average impact on Pension liability as on 31.03.2022|
|1 year||Increased by 2%|
|2 years||Increased by 4%|
|3 years||Increased by 6%|
|4 years||Increased by 8%|
|5 years||Increased by 10%|
As evident in the sample case study, companies could incorporate year on year improvements suggested by the actuary. This would ensure that there will be no sudden spike in the balance sheet liability at the time of revision of post-retirement mortality table and impact of revision in table on Entity’s financials can be controlled.
Please contact us in case of detailed analysis required for your Company’s pension plan.