On average, since 1980, life expectancy has increased, approximately 2 years for females (to age 85) and 3 years for males (to age 83). What you may not know is that longevity directly impacts the calculation of pension benefits. Every pension system has something called “mortality tables” that make assumptions used to calculate benefits.
If you are a city employee in TMRS, when you retire, TMRS determines your monthly benefit by dividing your accumulated deposits and city match (“reserves”) by an annuity purchase rate (APR) factor. . Mortality, or life expectancy assumptions in the mortality tables, directly affects the APRs. Because these reserves are being spread over a longer period of time, the monthly benefit will be lower.
Current TMRS mortality assumptions for calculating benefit amounts have not been changed since the early 1980’s and do not take into consideration increasing life expectancy. With no changes, employer contribution rates would increase on average by 10%. And costs would continue to rise over time. This would have forced many cities to reevaluate benefit options.
With that in mind, TMRS contracted to have a mortality study conducted and propose updated tables based on the findings of the study. This was done, and at the October TMRS board meeting, the board voted to adopt the new tables.
The new mortality tables will be used to calculate annuity purchase rates starting in January of 2015. These changes will not affect current retirees or those who retire prior to January of 2015. The new mortality assumptions are going to be phased in over 13 years in order to have as minimal impact as possible to employers and those employees who are near retirement age.
For example the current annuity factor for a retiring 60 year old is 12.1. Starting in 2015, this will increase one tenth of a point to 12.2 and will continue to rise one tenth of a point to 13.8 in 2027. Based on these factor changes, an employee’s joint survivor annuity will change by about 0. 5% less per year during the phase-in period. How does this directly affect a future retiree’s benefit?
Here is an example for a 50 year old who retires has 20 years of service, $45,000 salary, 7% city contribution rate with a 2 to 1 match. If the employee works three more years past the start of the phase-in period and retires in 2017 with a joint survivor annuity, the employee would receive $1,563/month using the new rates as compared to $1,585/month under the current rates, a difference of $22 per month. If the employee worked until the end of the phase-in period in 2027, their joint survivor annuity under the current rates would be $3,853/month. Under the new rates and with the 13 year phase in, the annuity in 2027 would be $3625/month, or $228 less.
So the new mortality assumptions will have an impact by lowering the expected amount of future retirees monthly annuity payments. It will mean that an employee may have to work longer under the new rates to get the same benefit they would get today under the current rates.
TMRS is expected to come up with a new annuity calculator to be rolled out January 1, 2014, that will allow employees retiring in the future to get a better estimate of what their annuity would be based on the new mortality assumptions.
CLEAT will stay on top of this issue and will keep you posted when additional information becomes available.
TMRS FAQ on Mortality Table Study and Assumptions: