New Mortality Improvement Scale Exposure Draft Released by SOA – It’s Your Move...

By Laurence Pinzur and Andrew J. Peterson

For the first time in nearly 20 years, pension actuaries in the United States need to understand the implications of a new mortality improvement scale. The SOA has initiated an extensive communication program designed to help actuaries prepare for important discussions with plan sponsors about longer life expectancies in the United States. How do you plan to get up to speed?

In March 2012, the SOA’s Retirement Plans Experience Committee (RPEC) released an exposure draft of Mortality Improvement Scale BB. The document describes RPEC’s development of an updated mortality improvement scale intended as an interim alternative to Scale AA, which many pension actuaries currently use to project base mortality rates into the future. The release of the interim Scale BB is part of a comprehensive review of pension-related mortality assumptions that is currently in process. The RPEC is scheduled to complete its Pension Mortality Study in late 2013 or early 2014, at which point the SOA is expected to publish new base mortality tables to replace RP-2000 and new mortality improvement rates to replace Scale AA. Given that the study is still more than a year from completion, the RPEC decided to release the interim improvement Scale BB for the projection of base mortality rates beyond calendar year 2000.

With the release of this new scale, both the RPEC and the SOA Pension Section Council are committed to educating actuaries in the retirement area both on the specifics of Scale BB and the broader topic of mortality improvement and its implication on retirement plans. A number of resources are currently available and more efforts are being planned. In addition to the March exposure draft, the RPEC recently released “Questions and Answers Regarding Mortality Improvement Scale BB,” which addresses many of the more frequently asked questions dealing with the development and application of Scale BB. In addition, the SOA Pension Section Council is developing continuing education sessions on the topic. Specific opportunities include a June 6, 2012 webcast (recording available), sessions at the SOA Annual Meeting in October (and other actuarial meetings) and a resource page of various papers and articles on mortality issues.

In contrast to prior mortality improvement tables, Scale BB is based on a new methodology that blends historic mortality improvement experience with expected future longevity trends in the United States. RPEC first produced two-dimensional gender-specific arrays of mortality improvement rates (based on age and calendar year) from which Scale BB was derived. Scale BB is intended to be applied on a fully generational basis to mortality rates with base year 2000. For actuaries who are currently using one of the RP-2000 base tables, therefore, the process for assessing the impact of switching from Scale AA to Scale BB is particularly easy. (Actuaries who are using mortality tables with base years prior to 2000, e.g., 1994, should refer to item B2 in the Q&A document regarding the appropriate application of Scale BB.)

It is important that pension actuaries understand the issues associated with mortality improvement in the context of our professional responsibility. Of particular relevance for actuaries practicing in the United States is ASOP 35, which requires an explicit assumption regarding mortality improvement (Section 3.5.3). The type of pension plan (private sector, public sector, multi-employer, etc.) and purpose of the valuation (accounting, funding, settlement, etc.) will determine the actuary’s specific role in the assumption setting process, from “choosing” to “advising” to using something prescribed by regulation. Nevertheless, regardless of the role, actuaries are often viewed as the experts on mortality and longevity topics. Therefore, getting up to speed on Scale BB is important for all pension actuaries whether advising private sector plan sponsors as they start thinking about year-end accounting disclosures and future years’ budget projections or making recommendations for funding in a public sector context.

As an introduction to the Q&A document, the remainder of this article features select Q & A’s that are likely of particular interest to retirement actuaries.

Q: Why did the SOA release an interim mortality improvement scale in early 2012 when it expects to provide an official replacement for Scale AA in late 2013 or early 2014?

A: Early on in the current Pension Plan Mortality Project, RPEC found that Scale AA was not tracking well with recent mortality improvement trends in the United States. While more time is needed to construct the ultimate replacement for Scale AA, RPEC believes actuaries should have access to an improvement scale that reflects more recent mortality improvement experience. Releasing the interim Scale BB also provides some lead-time to the developers of pension valuation software to enhance their software to handle two-dimensional mortality projection scales (see Question A3 from full Q&A document) and provides RPEC time to gather feedback and respond to questions from the actuarial community.

Q: Does the 1.0% long-term rate, implicit in the development of Scale BB, take into consideration the rise in obesity levels among the U.S. population?

A: RPEC reviewed numerous studies on the topic of future mortality trends, many of which presented arguments for the slowing of future mortality improvement in the US due to increasing levels of type-2 diabetes, coronary heart disease and cancer, all of which could be linked to rising obesity levels. On the other hand, a number of studies presented arguments for continued (and, in some cases, increasing) improvement in US life expectancies, citing advances in medical technology, genetic engineering and new pharmaceuticals. The 2011 Technical Panel on Assumptions and Methods, in their Report to the Social Security Advisory Board, considered factors affecting life expectancy gains, including obesity and smoking, and concluded:

“In 2006, as a consequence of the high prevalence of smoking and obesity, the U.S. life expectancy of 77.7 years was lower than that of most other high-income countries. These behavioral effects will likely continue to depress U.S. life expectancy. Yet, despite their increase for decades, indicators of smoking behavior and obesity have recently plateaued (National Research Council 2011). Therefore, it is reasonable to assume that the adverse impact of these behaviors on life expectancy will remain at current levels rather than continue to rise...”

RPEC placed significant weight on the analyses presented in recent Technical Panel reports in the selection of the 1.0% long-term rate. In particular, the 2007 Technical Panel on Assumptions and Methods recommended that 1.0% be used for the average long-term mortality improvement rate under the SSA’s intermediate-cost assumptions. The 2011 Technical Panel recommended an even larger upward revision, but the RPEC decided that 1.0% was most appropriate for the interim Scale BB.

Q: What factors should an actuary consider when trying to decide whether to adopt Scale BB?

A: According to Section 3.1 of ASOP 35, an actuary “should use professional judgment to estimate possible future outcomes based on past experience and future expectations, and select assumptions based upon application of that professional judgment.” Section 3.3.1 of ASOP 35 goes on to add that the actuary “should consider the assumption universe relevant to each type of assumption identified...” and that relevant sources include “studies or reports of general trends relevant to the type of demographic assumption in question (for example, mortality improvement in the United States).”

As mentioned in the answers to Q&A A1 and A2 (from full Q&A document), the Scale BB report and a number of other recent studies have documented that Scale AA has not matched up well with recent mortality improvement experience in the US. Not only is the data used to develop Scale BB approximately 20 years more current than the data used to develop Scale AA, the actuarial methodology underpinning Scale BB is considerably more advanced, blending actual past mortality improvement experience with anticipated future longevity trends. Given the more up-to-date data set and the enhanced methodology, it seems reasonable to expect that actuaries will give particular credence to the findings in the Scale BB report when selecting a mortality improvement assumption.

If the group being valued is large enough, a traditional mortality experience study could be useful in comparing the effectiveness of different mortality improvement scales over the recent past. Starting with the same base mortality rates, one set of actual-to-expected (A/E) ratios could be developed with expected deaths calculated using the mortality projection scale currently assumed, and a second set of A/E ratios developed with expected deaths calculated using Scale BB. A comparison of the resulting A/E ratios could provide useful information with respect to general mortality improvement trends of the covered group over the study period.

Of course, situations exist where the differences in mortality improvement assumptions have little impact on plan obligations, and the materiality language within ASOP 35 comes into play. For example, the decision regarding possible adoption of Scale BB for a cash balance plan whose participants overwhelmingly elect lump sum distributions could fall into this category.

Q: Why does RPEC recommend generational mortality over static projections?

A: At the time Scale AA was introduced, most valuation systems did not support generational mortality projection. One alternative was to create a static mortality table by projecting the base table rates with Scale AA to the valuation date plus the duration of the plan’s liabilities. The most visible application of this approximation is U.S.-qualified plan funding valuations based on the prescribed static mortality tables. While this technique tends to produce results that are reasonably accurate in the aggregate, different segments of the covered group tend to be over- or undervalued, depending on the demographic profiles of the various segments relative to the entire group.

RPEC also found that the static approximation to the full generational mortality assumption does not work as well with Scale BB as it did with Scale AA. In addition, static projections do not work well within a two–dimensional mortality framework, since it becomes difficult to incorporate cohort effects into a single static table used for a group including individuals with many different years of birth. In light of these considerations, and since virtually all valuation systems now support generational mortality projection, RPEC encourages pension actuaries to adopt Scale BB on a fully generational basis.

Q: Why is RPEC considering mortality improvement scales that vary by factors other than gender and age?

A: In its investigation of recent U.S. mortality improvement trends, RPEC had at its disposal more advanced tools than were available to the developers of previous mortality improvement scales. Some of the tools, such those that produced the two-dimensional heat maps (see Figures 3(M) and 3(F) in the Exposure Draft), helped RPEC identify long-term US mortality improvement trends that previously had for the most part gone unnoticed. For example, “period” effects show up as strong vertical patterns, while year-of-birth “cohort” effects show up as diagonal patterns in the heat maps. Interestingly, “age” effects—which would show up as purely horizontal patterns—are generally absent from Figures 3(M) and 3(F). This implies that age alone does not seem like a very effective way to project long-term mortality improvement in the United States.

New mortality improvement methodologies, such as the model developed by the Continuous Mortality Investigation bureau in the United Kingdom, not only allow for the recognition of recent age/period and cohort effects but also allow for the blending of these effects into a long term expected rate of mortality improvement. In other words, the mortality improvement scale is not just projecting past trends into the future but also allows for an expectation of the level of future long term mortality improvement.

For these reasons the RPEC is seriously considering two dimensional mortality improvement tables as the standard for future pension related mortality improvement scales.

In conclusion, the SOA is doing its part by providing multiple opportunities for pension actuaries to understand the development and implications of the updated mortality improvement rates. The next move is yours...

Laurence Pinzur, FSA, is a retirement consultant with Aon Hewitt. He is the current chair of the Retirement Plans Experience Committee. He can be reached at

Andrew Peterson, FSA, EA, MAAA, is staff fellow, retirement systems at the Society of Actuaries headquarters in Schaumburg, Ill. He can be reached at



June 2012, Issue No. 77