You don't have to be an actuary to know that the life expectancy of women in the U.S. is measurably longer than men—about five years longer from birth, at last check. The IRS mortality tables required to value liabilities for pension funding purposes put the spread around two years from most working ages between 30 and 65. Therefore, from a true actuarial perspective, women should receive higher lump-sum payments for equal monthly pensions if they are to truly replace the value of those expected future payments over their longer lifetimes.

But for lump-sum determination purposes, the IRS-mandated mortality tables are "unisex," meaning that the rates of death at each age are a blend of 50 percent male mortality and 50 percent female mortality. So the value of a lump sum is not based on the actuarial life expectancy of a man or a woman but rather on a hypothetical androgynous person whose life span falls midway between the two.

Women unknowingly subsidize men

The end result? When it comes to lump sums, at current interest rates women are actually subsidizing men by about 2.5 percent of the value of their pensions.

According to the unisex mortality requirements, men receive about 102.5 percent of the value of their expected lifetime pension. Women receive about 97.5 percent or 95 percent as much as men. See the illustration for a closer look at these numbers.

Adding insult to injury, women generally have lower DB pensions in the first place due to traditional employment patterns (dropping out of the workforce temporarily for family reasons) and the aforementioned gender wage inequality.

Since offering lump sums to transfer risk out of DB plans is all the rage these days, this is an issue that will be experienced by many women in the next few years. I'm sorry to report that there is no legal avenue for recourse, as the lump-sum rules are very specific, and unisex mortality has been a part of them for decades. But at the very least, women reviewing their election forms should know that this gender subsidy is part of the lump-sum choice.

Plan sponsor considerations

Awareness of lump-sum gender equality also raises some economic and ethical considerations for plan sponsors. This is because every other pension annuity liability computed by actuaries for funding, accounting and Pension Benefit Guaranty Corporation (PBGC) premium purposes uses gender-specific mortality assumptions. As a result, the funding requirement and accounting cost for a woman is slightly higher than the cost for a man with the same age and pension benefit.

Even the cost of purchasing annuities from an insurance company as part of a risk transfer is based on separate mortality assumptions for males and females. (And men actually receive higher monthly payments than women for equal premium payments.)

Unisex mortality has therefore unintentionally created a greater incentive for sponsors with heavily female workforces to offer lump sums as a means of reducing cost. Cashing out women immediately saves 2.5 percent of the liability as it is transferred to the individual participants, while men require payment of a 2.5 percent premium to do the same. Lump sums are economically a better deal for employers in female-dominated fields like health care and worse for traditionally male industries like manufacturing.

Of course, sponsors are always free to offer lump sums on a basis greater than the IRS minimum, but this necessarily adds cost since payments to men could not be reduced below the IRS unisex value.

Unisex mortality shortchanges women

An important part of being an actuary is making assumptions based on observable data. To date, it is clearly observable that women live longer than men, and the cost of providing women lifetime pensions is relatively more expensive. Artificial gender equalization of lump-sum conversions through IRS regulations distorts this fact and provides a lesser value to women in exchange for their pensions.

The unfortunate result? Women are paid 95 cents on the dollar for trading the same lifetime pension promises as men.

You can read more from Mike on blog.principal.com.

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