Recognition of Reduced Life Expectancy
By: Marvin Snyder
One of the fundamental assumptions in the valuation of pensions in divorce when the pension involved is in a defined benefit pension plan is that the plan participant is in normal good health. Usually this is a safe assumption, because if the person is an employee actively at work it may be presumed that he is part of the group to which normal mortality patterns apply. In fact, the standard pension mortality and annuity tables are based on active working lives, not on the total general population.
Occasionally, however, the question of valuing a pension arises when the person has some medical or health condition that may possibly impact on his or her longevity. In the present state of medical science, it is not unusual to find active employees who have had coronary bypasses, organ transplants, hypertension, etc.
My approach involves a major condition: if he or she is actively engaged in an occupation or profession and is a participant in a pension plan, then irrespective of the health or medical status he or she is covered by the standard tables.
The problematical cases are those in which the participant has retired and is receiving a pension, or has terminated service with a vested right to a deferred pension. In these cases, sometimes a closer look is needed to decide which mortality table to use.
There are available three versions of the standard pension mortality tables.
Table A is designed for use with healthy individuals, viz.: (a) active employees, or (b) retired or terminated participants in average health.
Table B is used for an individual whether active, terminated or retired, who has a medical or health condition that would be classified as a disability, but who would not be eligible to receive disability benefits under the rules of Social Security. Mortality under this table has more deaths at age 65 expected than in Table A by about 10%, so a pension for a person using Table B is worth about 10% less than the results would be in Table A.
Table C is used when the person would be eligible for Social Security disability, or who in fact is receiving a Social Security disability pension. Mortality under this table has more deaths at age 65 expected than in Table A by about 25%. That is, the value of a pension for such a person is about 25% less than for a normal, healthy person at age 65.
Being an actuary and not a physician nor a life insurance underwriter, I cannot make a judgment to use Table B or C. I routinely use Table A unless counsel provides sufficient documentation to warrant use of a table with heavier mortality.