How Does the Choice of Mortality Tables Affect Present Values?
Not surprisingly, shorter life expectancies result in lower present values. To assess the cost of an annuity or the funding of a pension accurately, the plan actuaries must first analyze over what time period those payments are likely to be made. If an evaluator chooses to use a mortality table such as the UP84 table instead of the GAM-83 table, plan participants would be assumed, on average, to live significantly shorter lives. Using the UP-84 table and keeping the interest rate(s) constant would result in lower present values. The GAM-83 table reflects more recent trends toward greater longevity by U.S. workers. Once again, consider that actuaries do not employ fixed life expectancies in calculating present values. Instead, they calculate the amount of each pension payment over all possible life expectancies and sum those values, which reflects the possibility that the person could die tomorrow or live far beyond the fixed life expectancy.
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- How Does the Choice of Mortality Tables Affect Present Values?
