Public Retirement Systems Death Benefits and Pension Values
By: Marvin Snyder
The defined benefit pension plans for employees of governmental or quasi-governmental organizations, particularly school teachers, provide pension benefits and death benefits.
A typical benefit given by a Public School Employees Retirement System (PSERS), which they call present value is the dollar amount of the death benefit; it is not the present value of the pension benefit. Unfortunately, the state government bureaucracy often adopts this terminology which leads to confusion in equitable distribution cases.
The PSERS death benefit is quite generous and is a very much larger amount than the value of the pension as a pension. On the usual individual annual statement of account that PSERS issues, the death benefit may be referred to in parentheses as the present value. It's a good employee benefit as life insurance, but it does not indicate what the pension benefit is worth.
When PSERS uses the term present value, they mean the death benefit payable to the beneficiary of a covered member. The annual account statement given to members may show the item labeled as death benefit or as present value.
PSERS generally provides a very generous death benefit, which they compute using a low interest rate, say 4%. There is a standard mathematical inverse relationship between the interest rate and the present value. The lower the interest rate, the higher the present value of a future payment. So, by using an interest rate as low as 4% a very high death benefit is produced.
The death benefit is not the value of the retirement pension. The present value of the retirement pension itself is usually not computed nor shown by PSERS. Upon receiving an inquiry for a pension present value in a divorce action, the amount of the death benefit mislabeled as present value may be given.
Upon retirement, many options are available to the member, some of which reduce or even eliminate a death benefit. Generally these systems require employee contributions, and often interest is credited on these contributions at a very low rate, say 4%.
The rationale is that the low investment credit awarded on employee contributions is balanced by the high death benefit that is derived by using that very same low rate. In looking to the future for investment gains on present amounts, higher interest rates generate higher results. But in determining the value now of money due in the future, higher interest rates mean a lower present value.
By using a low internal interest rate, PSERS is able to provide a large death benefit but is not obligated to bestow significant interest earnings on employee contributions. Many more employees will leave service and withdraw their contributions with interest, than will die in service. The apparent generosity of the death benefit may be considered upon reflection to be overshadowed by the paucity of investment earnings on the employee's own money.
Is it misleading to communicate the death benefit as a present value, or is it just bureaucratic terminology? Either way, please don't accept such a figure to settle an equitable distribution of a pension in divorce.