Divorce Tips Database

(Un) Reasonable Pension Values in Divorce

By: Marvin Snyder

When is it reasonable to discuss a choice of valuation methods between the evaluator and counsel, and when is it reasonable for the evaluator to illustrate various results by varying assumptions?

The general response to the second part of the query is that it is reasonable to show different results that occur from different reasonable assumptions. For example, in a defined benefit pension plan with a "floating" retirement age, it is helpful to see how the values change as different retirement scenarios are presented.

It is also reasonable to look at how results vary for different cut-off dates, such as when the date of marital separation is in dispute. Another variation that may be reasonably illustrated occurs when there are employee contributions in the plan: to see how values change if employee contributions remain in the fund or are withdrawn.

The bright line test for reasonableness is that the approach is objective and professional, not selected to advance a particular point of view or with the appraiser acting as an advocate for either side. The unreasonableness arises when the evaluator offers a choice of methods to counsel to select.

Discussion of a choice of methods is quite a different matter. Reasonable assumptions may well differ with reasonable explanations for their difference. An evaluator who uses different methods on a case by case basis, however, is subject to question.

The standard pension valuation method in general usage involves the determination of the accrued pension benefit and the marital portion thereof by use of a coverture fraction, and the marital present value is then computed by use of proper actuarial factors involving mortality and interest, often the PBGC tables.

A different method that is sometimes found is used by non- actuaries and involves "life expectancy". The evaluator looks up the life expectancy of the employee in a standard census table and multiplies by a compound interest factor to determine present value. This is unreasonable and inaccurate.

No pension plan is funded by use of life expectancies, nor is such a concept utilized by the IRS or the PBGC (except in a very limited way by IRS to determine the required payouts after age 70 1/2). The correct mathematical method uses the probability of mortality which exists each year from the person's current age to the end of the table, usually age 105. No prediction is made in mortality as to how long a person will live or when he or she will die.

PAC provides pension valuations, QDROs and actuarial reports for divorce attorneys and marriage dissolution mediators nationwide. Our Philadelphia offices are located in the suburb of Elkins Park, Pennsylvania, from where we serve the needs of legal professionals nationally, including east coast states such as New York, New Jersey, Virginia, North Carolina, Florida, Washington, D.C., and Maryland. Our Florida office located in Coral Gables, FL serves Florida family attorneys.
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E-Mail: pac1@pensionanalysis.com


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