Interest and Values
By: Marvin Snyder
The interest rates currently in use by the Pension Benefit Guaranty Corporation (PBGC) are at an all-time low.
The highest level that they reached was in 1982. The present value of a pension of $1,000 per month for a man aged 40 with retirement age of 65 would be $25,500 using November 1991 rates, and would be $11,000 using 1982 rates.
There is an inverse relationship between the interest rate and the present value. The interest rate, sometimes called the discount rate, reflects the time value of money.
For a certain amount needed in the future, less is needed today if the interest rate is high. Similarly, more is needed today to meet the future requirement if the interest rate is lower. The amount needed in the future may be a lump sum or an annuity form of payout, but in either case the present value is sensitive to the interest rate assumption.
When the pension in a divorce case is included as a current asset for immediate offset its present value must be computed. If there are insufficient assets of the marriage so that a comparative offset cannot be accomplished then a form of deferred distribution would be utilized, probably by the use of a qualified domestic relations order (QDRO).
What interest rate to use in the valuation of a pension for immediate offset in equitable distribution in divorce becomes less of a problem if two issues are standardized. The first issue is the date of calculation, that is, the valuation date. In most jurisdictions marital property is valued currently, not what its value was at the date of marital separation or filing of the divorce complaint, but what it is worth when the case is being settled. The valuation date should be as current as possible to the so- called distribution date, which may be the date of trial, hearing or other settlement or adjudication date at which the property matters are decided. The second issue in valuation is the interest rate. It has become more and more common to use PBGC rates as they are nationally available, published by the federal government for defined benefit pension plans, and they reasonably reflect current fair market values of immediate and deferred annuities. PBGC rates are announced monthly, sometimes remaining the same for several months and sometimes changing from month to month. In the valuation, the current PBGC rate for the month of the valuation should be used, not whatever rate may have been in effect in the past.
If a valuation has been done and more than a year has passed without the case being resolved, a new valuation should be done to arrive at the proper current value.
A totally separate and distinct matter is what pension benefit to use in the valuation. That varies by jurisdiction. In some places, the benefit is used as it stood at the date of marital separation or the time of filing of the divorce complaint. In others, the current benefit is valued. Whichever benefit is used, past or present, its current present value is computed. We always determine today's value of a pension, whether that pension is yesterday's or today's. The valuation date and the pension determination date may be quite different and quite correct.