Earlier this year, the 2018 Heubeck mortality tables were published. These tables are used to measure the value of pension liabilities in Germany. In this article, our MBW International colleague Isabel Coles explained that these new mortality tables would increase the value of pension liabilities on companies’ balance sheets.
Recently, the Royal Dutch Actuarial Association (Koninklijk Actuarieel Genootschap or AG) also updated mortality rates, Projections Life Table AG2018 (Prognosetafel AG2018), for the Netherlands. The new projection tables used the same methodology as the 2016 AG report. The update mainly reflects newer data. Interestingly, while new mortality rates are expected to increase pension liabilities in Germany, the new Dutch rates are expected to lower pension liabilities in the Netherlands. In light of this development, there are several considerations Dutch companies should think about.
Companies are expected to adopt this table for their year-end 2018 pension liabilities. The new table assumes a slightly higher expected mortality. This means that contrary to the German update, the Dutch update is not expected to result in an increase to the defined benefit obligation, but is more likely to result in a 1% to 1.5% reduction. With pension assets unaffected, the effect on companies’ pension liabilities would be larger than this 1% to 1.5%. A reduction of pension liabilities is advantageous for companies with pension plans because it increases their solvency ratios and equity reserves.
Mergers and acquisitions must be reevaluated to account for the effects liability reductions will have on companies’ balance sheets. Lower pension liabilities increase a selling company’s net worth so it can ask for a higher price.
Depending on the impact of the higher expected mortality on companies’ equity reserves, the update may also enable companies to distribute more profits to their shareholders.
For additional information about the AG2018 mortality tables, contact your Milliman consultant.