Actuarial valuation: New mortality improvement scale released

Nov 04, 2021
Employee benefits
Audit Other accounting topics Financial reporting Employee benefit plans

Professional associations of actuaries and actuarial companies occasionally develop and publish updated mortality tables to reflect changes in mortality conditions based on recent historical trends and other information. On October 20, 2021, the Society of Actuaries released an updated mortality improvement scale, Scale MP-2021, which plan sponsors will need to consider when measuring benefit costs and obligations of plans that provide benefits based on the life expectancy of participants. For financial statements that have not been issued, this new scale should be considered regardless of whether the benefit information is presented as of the beginning or end of the year, and regardless of the date of the valuation report.

Per Financial Accounting Standards Board Accounting Standards Codification (ASC) Topic 855, Subsequent Events, information that becomes available after the balance sheet date (but before the financial statements are available to be issued) may be indicative of conditions existing at the balance sheet date when that information is a culmination of conditions that existed over a long period of time. American Institute of Certified Public Accountants Technical Questions and Answers Section 3700.01, Effect of New Mortality Tables on Nongovernmental Employee Benefit Plans (EBPs) and Nongovernmental Entities that Sponsor EBPs, provides guidance on how ASC 855 should be considered when new mortality tables are issued, and concludes that Generally Accepted Accounting Principleseach individual assumption used in valuing a plan’s obligation should represent the best estimate of the plan's future experience solely with respect to that individual assumption. In making this plan obligation estimate, all available information through the date the financial statements are available to be issued should be evaluated to determine whether the information provides additional evidence about conditions that existed at the balance sheet date.

Scale MP-2021 is based on more recent mortality data than any of the previous mortality improvement scales and should be considered regardless of the base mortality table used in the valuation (i.e., Pri-2012, RP-2014, Pub-2010, or a table based on the plan’s own experience). If the related financial statements were not issued prior to October 20, 2021, GAAP requires the change in the mortality scale to be considered in the latest actuarial valuation, even if it is presented as of the beginning of the year or if the valuation was prepared prior to the release of Scale MP-2021. That’s because the updated mortality improvement scales are based on historical trends and data that go back many years, such that they are generally viewed as being indicative of conditions that existed at the balance sheet date.

Some actuaries are applying adjustments to Scale MP-2021 or to the base mortality table to reflect the anticipated effect of COVID-19 on future mortality rates. The use of such an adjustment is not necessarily reasonable or unreasonable, but will need to be evaluated on a case-by-case basis.