16.08 Cost of Living Adjustments

Many non-ERISA plans provide cost of living adjustments or COLAs. ERISA plans are not as generous as government plans, and rarely have COLAs. Chapter 19 on Fortune 500 company pensions will illustrate just how much more generous the federal Civil Service Retirement System (CSRS) is in comparison to Fortune 500 company plans. Even without the COLA, the CSRS pension has a much higher present value. Sometimes, COLAs are given in ERISA plans on an ad hoc basis, but not every year. Non-ERISA plans that have annual COLAs base the COLA on the consumer price index. If the actuary includes the COLA in his or her present value calculation for immediate offset purposes, this leads to a much higher present value. Some states allow for the COLA to be included in the pension valuation, 6 while other states do not? Even if the COLA is included, no one knows what inflation will be many years from now, and a competent pension valuator will illustrate a range of COLAs. The employee's attorney should strongly resist including the COLA as a benefit that is too speculative to include in the pension calculation. This issue could be resolved by a QDRO or QDRO type order that gives the alternate payee a pro-rata share of the COLA, if any. The CSRS and military pensions are not qualified under ERISA and do not use QDROs. The QDRO equivalent for CSRS is called a Court Order Available for Processing (COAP). The military order is called a Military Court Order (MCO).

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