Learn About Pensions

How to do a Pension Valuation

  1. Beginning
  2. Intermediate
  3. Advanced Levels

This article contains a broad review of pension valuation specifically written to pro vide divorce attorneys with the necessary background information for handling issues that arise frequently in practice. Part 1 presents a review of a pension valuation at three levels: beginning (or basic), intermediate, and advanced. Part 2, which will appear in the summer issue, will focus on special issues such as a divorcing spouse who is already retired and disability, and it will offer general guideposts for handling these issues.

Beginning Level

At the beginning, we assume a plain and simple defined benefit pension plan, in which the benefit is given and all of the ages and dates are known, and there is one stated normal retirement age (age 65). The plan member is a male, currently age 45. All of his service to the date of divorce is community property in this example. The prevailing interest rate is 5.50 percent. Normal mortality is assumed in accordance with standard tables.

The member's accrued and vested monthly pension benefit is provided by the plan as of the date of divorce, based on his credited service and average pay, under the plan's benefit formula to be $1,000 per month, payable to him at age 65. This applies regardless of any future service and ignores any potential future pay increases. The possibilities of disability benefits, pre-retirement death benefits, or early retirement are ignored, as is taxation. No cost-of-living increases are considered, nor any incentives nor enhancements. With no further service at all, he is entitled to an annual pension guaranteed from the plan of $12,000 starting at age 65 for the rest of his life. All he has to do is live to age 65.

By reference to a standard actuarial table at 5.50 percent, for a male age 45, and with benefit commencement at age 65, we find the factor for an annual benefit of $1,000 to be 3.0927. This means that it "costs" $3.09 today for a man age 45 for every $1,000 of yearly pension benefit to start 20 years from now at age 65. But, usually, we deal with monthly, not annual, pensions. Therefore, we apply the factor as follows: multiply the factor by 12, and multiply that result by the monthly pension benefit. This proceeds as follows: 12 x 3.0927 x $1,000 = $37,112.

In this beginner level example, today's present value of the 45 year old husband's current accrued pension benefit of $1,000 per month payable at age 65 is $37,112. Note the time frames: the man's age is now, his benefit is what he has earned up to now, its value is what it is worth now, but its payment date is set for when he reaches age 65. The possibility that he could die before age 65 is incorporated into the value by the internal use of the mortality table in the factor of 3.0927. That factor also includes the interest discount at the stated interest rate (5.50 percent in this case) for all time forward from the date of the valuation.

Variation for a Female Employee

For purposes of evaluating a pension in a divorce matter generally it is advisable to use a gender based mortality table, although sometimes it could be acceptable to use a blended table if it is not distorted or too heavily weighted toward either male or female mortality statistics.

Using the same example as above, but for a female employee, we would arrive at different numbers. For a female age 45, with retirement age 65, and an accrued monthly pension benefit of $1,000, the present value at 5.50 percent with standard female mortality is $45,776. This value for a female is 23 percent greater than for a male of the same age and in the same pension plan. The female factor is 3.8147; that is, at age 45 it "costs" $3.81 for every $1,000 of annual pension benefit payable at age 65. For the male it was $3.09.

When we get to age 65, the increase in value of a female over a male is about 17 percent.

The factor at age 65 for a male retiring at age 65 (at 5.50 percent interest and standard mortality) is 10.2878 or $10.29 per $1,000 of annual pension benefit. For a female age 65 the factor is 11.9930, or $11.99 per $1,000 of annual pension benefit at 65 using the same actuarial assumptions but recognizing the statistical difference in longevity by gender. The age 65 present value of $1,000 monthly pension starting immediately for a male at age 65 is $123,454. For the female it is $143,916. As is the case with all present values, the figure is applicable only at the age stated, using the particular pension benefit, and based on the actuarial assumptions.

Basic Factors

The basic factors needed to compute the community portion of a present value of a pension are:

  • Sex
  • Age
  • Retirement age
  • Benefit amount
  • Interest rate
  • Mortality basis
  • Actuarial factor
  • Coverture fraction

The mortality basis incorporates the sex of the individual statistically, so the list could contain seven rather than eight items, but sex is listed separately so that it won't be overlooked.

The age is usually the age of the person within six months either way of the nearest birthday, which is known as "age nearest birthday." It is possible to use attained age the age of the person as of the last birthday achieved, or age next birthday, or age at last birthday plus one-half year but generally, age nearest birthday is sufficient.

The retirement age is usually taken as the age at which it is assumed that the pension benefit will commence. In some cases an earlier or later age of benefit commencement may be assumed depending on the facts and circumstances of the situation.

The pension benefit is usually expressed in monthly terms, but if it is used as an annual amount the actuarial factor must be adjusted to reflect this. The evaluator selects the interest rate and in most cases it is the most sensitive assumption, the one most open to discussion and challenge. The evaluator must be prepared to explain and justify the interest rate assumption.

The mortality basis is usually a standard pension mortality or annuity table. Note that it would not be appropriate to use a life insurance table. Life insurance tables are constructed to be conservative by assuming less longevity, while annuity tables are conservative by assuming better longevity.

The actuarial factor is constructed from the data and assumptions already discussed: sex, age, retirement age, interest, and mortality.

The coverture fraction is the allocation factor used in the time rule to segregate community property from separate property. The numerator is the length of time from (1) the later of date of marriage or date of plan entry to (2) the measurement date of the pension benefit. The denominator is the length of time of benefit credit as of the measurement date.

Two examples are presented below to further illustrate basic pension valuations in divorce cases.

Example: Male, age 35, current pension benefit of $600 per month, payable at age 60, married 7.5 years, employment service to date 10 years, assumed interest rate 5.00 percent, standard male mortality, actuarial factor per $1.00 of annual pension is 3.316, coverture fraction is 0.75. Present value equals 12 x $600 x 3.316 = $23,875. Marital present value equals 0.75 x $23,875 = $17,906.

Example: Female, age 42, current pension benefit of $720 per month, payable at age 62, married 10 years, employment service to date 20 years, assumed interest rate 5.50 percent, standard female mortality, actuarial factor per $1.00 of annual pension is 4.131, coverture fraction is 0.50. Present value equals 12 x $720 x 4.131 = $35,692. Marital present value equals 0.50 x $35,692 = $17,846.

The concept of "life expectancy" is utilized in the mortality table. The factor has built into it the probability that the individual could die at any time from now throughout the span of the mortality table (usually to age 105). This use of life expectancy does not predict the date of death; we don't know how long he will live, nor at what age he will die. We have, however, discounted the value for his potential death measured by probability factors.

The use of the interest rate does not predict what interest rates will be, or what investment results may be obtained throughout his life span. Rather, it is intended to reflect real life interest rate values at the present time, generally measured by the current yield on 30year US Treasury bonds.

Questions That Usually Arise

At the beginner level, the following questions usually arise:

  • Where do I get the benefit amount?
  • Where do I get the retirement age?
  • Where do I get the interest rate?
  • Where do I get the factor to use?

In the plain and simple case, the plan will provide a benefit statement or a letter setting forth the actual or estimated current accrued benefit for service to date. Be careful to distinguish between an annual benefit and a monthly benefit figure. In some cases it may be possible to compute an estimated benefit, particularly if there is an easy benefit formula in the plan. One such example would be one percent of three year average pay times years of service. If the average pay is known or can be reasonably estimated, and if the service is known or can be approximated, a benefit can be derived that would be sufficient for most purposes. For example, 0.01 times $30,000 average annual pay divided by 12, times 20 years of service, equals a monthly pension benefit of $500.

The benefit statement or letter will also in most cases give the retirement age. The interest rate to use in a common case would be something equal or near to the current US 30year Treasury Bond rate.

The factor to use may be the most difficult part of the solution. Contacting an actuarial firm or pension consultant may be necessary to obtain a reasonable factor, given the facts and circumstances of the particular case.

In an uncomplicated case, we find the benefit amount and the retirement age from the employee's routine benefit statement, or in a letter from the plan. The interest rate to use in determining the value of the pension is an assumption selected by the evaluator. For most of the year 2001, the prevailing reasonable interest rate would fall in the range of 5 percent to 6 percent. If the evaluator uses an interest rate outside that range it should be queried for its source and the justification for its use.

What If's

These and other issues will be covered in the following sections:

  • What if there are different retirement ages possible?
  • What if early retirement is to be considered?
  • What if there are employee contributions?
  • What if there is a cost-of-living feature in the plan?
  • What if the employee has credited service that occurred before the date of marriage, or after the date of cutoff for counting community property?
  • What if the person is already retired and receiving a pension?
  • What if either the employee or the spouse is in poor health?

Intermediate Level

At the intermediate level we appreciate the impact of varying interest rates and mortality tables on the present value of a pension as marital property in divorce.

First and always, keep in mind the standard inverse relationship between interest rates and present values. Remember that the higher the interest rate, the lower the value. Avoid the trap of thinking that a good, high interest rate will produce a higher pension benefit. That is simply not so in a defined benefit pension plan. The pension benefit is not affected by the underlying investment results of the plan's funds. The pension benefit is determined by the formula in the plan, service; average pay; and other factors but not interest rates.

The Mortality Basis

Next in consideration is the mortality basis. The more current and modern tables project better longevity and thus higher pension values. The benefit is worth more if it is assumed that the person has a better chance to live to collect it, and then lives longer in the payout phase. Note specifically that the mortality rates should come from a pension annuity table, not from an life insurance table. Further, note that these are probability rates of death, not specific ages of death from a life expectancy table.

A pension plan is not permitted to discriminate in its benefit amounts by sex. That general statement, however, is modified in two ways. The various optional forms of death or survivor benefits available at retirement may be computed by the plan, taking into account the sex of the employee and of the beneficiary. The value of the pension determined as marital property may take into account the sex of the employee (and when applicable, the sex of the beneficiary). In most cases it would be preferable for the evaluator to use a sex distinct table to calculate the value of a person's pension.

Some defined benefit pension plans allow employees to make voluntary contributions, and some older corporate plans (numbering fewer and fewer) require employee contributions. Many governmental plans (federal, state, city, police, fire, and/or schoolteachers) generally do require employee contributions.

Employee Contributions

When there are employee contributions, it must be ascertained whether they are voluntary or mandatory, whether they earn interest and if so, at what rate and whether they are refundable and if so, under what conditions. If the case is that the employee's contributions are included in the funding of the pension, such as would be the case, for example, in a governmental plan, such funds would not have to be counted as part of the pension value. If the employee monies were available as a payout without reducing or acting to forfeit the pension benefit, however, the amount would count as part of the total value of the pension. In some cases, the plan may allow a full or partial withdrawal of employee contributions with a subsequent reduction of the pension benefit, so that the person receives a two-part payout: a lump sum for the employee contributions plus a smaller monthly pension benefit. When this combination is available, the evaluator may wish to take it into consideration in the determination of the value of the pension as marital property. It would constitute an alternative result in the valuation report to reflect the possibility that the employee may take that action.

Consideration must be given to how much, or what portion, of the pension value is community property after the value itself has been computed. In the simplest case, all of the pension credits were earned during the marriage resulting in full marital property value for 100 percent of the pension value.

The Coverture Fraction

The portion of the pension value that is found to be in the community is determined by use of what is called the coverture fraction. The use of the coverture fraction comes under a method generally known as the time rule.

The generalized formula for the coverture fraction is as follows: The numerator is the length of time (measured in units of years, years and months, years and fractions of a year, or months) from the later of (1) the date of marriage or (2) the date at which credited pension service began. The denominator (measured in the same units as the numerator) is the total length of credited pension service as of a specific date. The specific date in the denominator is determined in concert with the pension benefit being valued. If the benefit is used as of the date of divorce, for example, that is the date to be used as the end point in the denominator of the coverture fraction. If the estimated or actual benefit at retirement age is being used, the end point of the denominator is the date at that age. The denominator terminus must always agree with the benefit payment date.

Example: Employee married four years before entering the pension program, and the marriage ends after sixteen years. The coverture fraction is 12 years of marriage while in the plan, divided by 12 years in the plan, or 100 percent. The current benefit at the date of divorce is used.

Example: Employee married four years after entering the pension program, and the marriage ends after 16 years. The coverture fraction is 16 years divided by 20 years, or 80 percent. The current benefit at the date of divorce is used.

Example: Employee married four years after entering the pension program, the marriage ends after 16 years, and the estimated pension benefit at retirement is being considered where retirement is estimated to occur 14 years hence, after the date of divorce. The coverture fraction is 16years divided by 34 years, or 47 percent. In this example, the benefit by which the coverture fraction is multiplied must be the benefit estimated to be available at retirement, with 34 years of credited service.

The assumption of retirement age is one of the basic features of a pension valuation.

It should be clearly understood that the calculation assumes payment at that age, but does not predict that the employee will retire at that age. An employee who leaves service with full vesting at an age before being eligible to retire will receive the vested benefit at the plan's normal retirement age. That is the age at which we assume payment will be made. Consider an employee who at the time of divorce is not yet eligible to retire, but who goes on into the future to continue working and to retire at an age beyond the plan's normal retirement age. We have no way of knowing that now, so we assume benefit payment at normal retirement age as the most rational approach for valuation purposes.

Retirement

A plan may offer different normal retirement ages based on combinations of age and service. An example would be age 65 with 5 years of service, age 60 with 10 years of service, or age 55 with 20 years of service. If the person in the divorce action is of an age and with service that could allow retirement in the future at any one of the possible retirement ages under the plan, this may be taken into account in the valuation. We cannot predict when retirement will occur, but we can illustrate the results of various retirement ages. The distinction to be made is that the attainment of any one of these conditions is normal retirement age with no reductions for early retirement. Another thought is that if the employee does, in fact, retire at the earliest possible normal retirement age, there is no chance to increase the pension as there would be if work continued with additional future service credits and with potential future pay increases.

Most defined benefit pension plans contain early retirement features. The employee, if vested, may voluntarily retire at an age earlier than the plans normal retirement age and thereby receive a reduced pension benefit. In most cases, the reduction will be somewhat reasonably close to being mathematically equivalent to the unreduced normal benefit. Again, it most cases, not much new information is obtained by looking to early retirement unless the employee is known to be actually contemplating or has already applied for early retirement. From time to time a case will arise when the potential or actual early retirement benefit would generate a significantly diverse value that should be explored. The subjects of enhanced or incentive early retirement opportunities are covered in the next section.

Advanced Level

The advanced items that may occur in more complicated pension situations include early retirement incentives and enhancements, postretirement cost-of-living (COLA) increases, benefit projections, retired and terminated employees, and individual underwriting.

These advanced topics may potentially lie in the future, with the possibility of becoming available and thus affecting the value of the pension, or one or more of the items may have been attained already. The evaluator must always be conscious of the time frame involved and take notice of the status of the employee spouse with respect to his or her position in the plan with respect to eligibility for any of these features.

A balance must be taken in evaluating the potential possibility of an employee reaching one of the subject items. Certain questions should be given consideration; for example, If a particular item does not at present exist in the plan, is it overreaching or speculative to allow for the possibility that the plan could institute such a feature at a later date? If such a feature is put into place at a later date, is it marital property? Could the employee have taken advantage or utilized a special plan feature had he or she not already performed an amount of covered service during the marriage, which serves, in part, as the basis for some later plan development?

Early Retirement

Early retirement incentives are sometimes offered by a plan to provide enhanced benefits to eligible employees as in inducement to leave the labor force. This causes an increase in pension costs for the employer, but saves future salaries and related fringe benefits that no longer have to be paid to the employee.

One of the common approaches is to offer special early retirement for a limited time period to a prescribed group of employees. The time allowed for an eligible employee to elect to participate is often known as the "window period," and the benefits may be described as "window benefits." The plan may define the eligible group in any nondiscriminatory way. Salary level, age alone, or sex cannot be conditions, but length of service or a given combination of age and service can be set as the eligible requirements.

A common benefit enhancement during the window period for an eligible employee who applies for special early retirement would be that the employee's pension under the plan benefit formula is adjusted by adding a specific number of years of credited service to the person's actual service and/or by adding a specific number of years to the person's actual age. For example, a plan may allow "normal" early retirement at age 60 with 10 years of service. For a one year period, starting at a named date, five years of service is added to the employee's credit and the employee is considered to be two years older than actual. If these adjustments would boost the employee into "normal" early retirement eligibility, that person may then elect within the window period to retire early and to thereby receive an early retirement benefit not otherwise available, or larger than would have been available on the plan's regular schedule. If the adjustments do not push the person into the range of early retirement, the person is not in the eligible group and the program has no meaning for that individual.

Early Retirement Incentive Example

A typical defined benefit pension plan may have the following routine early retirement schedule for retirement between ages 60 and 64 when the normal retirement age is age 65, illustrated for an employee with an a current accrued monthly pension benefit of $1,000.

Age at Early Retirement Reduction Factor Early Monthly Pension

Age at Early Retirement Reduction Factor Early Monthly Pension
64 0.95 $950
63 0.90 $900
62 0.85 $850
61 0.80 $800
60 0.75 $750
59 N/A N/A

The plan announces a one year window period during which two years will be added to an employee's age to increase the number of people eligible for early retirement and to increase the pension benefit for those already in the range as well as for those newly eligible.

The new (temporary) early schedule looks as follows:

Actual Age Enhanced Age (Max. 65) Factor Early Monthly Pension
64 65 1.00 $1000
63 65 1.00 $1000
62 64 0.95 $950
61 63 0.90 $900
60 62 0.85 $850
59 61 0.80 $800
58 60 0.75 $750

Under this window opportunity, an employee now age 60 who elects to retire would receive 85 percent of his pension instead of the 75 percent under the standard schedule. Employees who are now age 58 or 59 would be able to retire early with a pension not otherwise available in the absence of this incentive program.

A plan may institute a far more complex early retirement incentive program, focused on service as well as age, or restricted to certain departments or divisions of the corporate employer. In any case, the pension evaluator may choose to consider the possibilities and weigh the potential impact on the varying pension benefits as marital property.

In a divorce matter, it is advisable to use a gender based mortality table.

If the employee has already retired under some special program during the marriage, it is probably a moot issue. But it could be a very important element for consideration if the employee has retired under a special program in the interim period between date of cutoff for measuring marital property in a particular jurisdiction and the final date of divorce or settlement of all property issues.

The pension evaluator may approach this by preparing alternative valuations of the pension assuming different retirement ages and different adjustment amounts for early retirement. These alternatives then may be considered by counsel and by the court for their appropriateness and applicability in a given matter.

In most cases it will be found that the actuarial value of an early retirement enhancement is greater than that of the un-enhanced benefit, but whether this is included as marital property depends on the facts and circumstances of the case.

Date of Valuation

The date of the valuation of the pension benefit depends on the jurisdiction, but is almost always a current date, using the present ages of the parties, the currently prevailing interest rate, and any other facts and details that are current so that the pension value is fairly presented for adjudication. The benefit being valued, however, is not an exactly established concept. As discussed above, it could be a normal retirement benefit, an early retirement benefit, or an enhanced early retirement benefit. A further element of measuring the benefit is the dollar amount of the benefit as of a selected date. As always, we are careful to distinguish the benefit from its value.

In discussing the benefit, we refer to the monthly pension benefit that will be payable to the retiree. The value of the benefit is what it is worth, or what it could be purchased for, that is its present value. So, what benefit do we consider for this purpose? With respect to a time frame, there are three common possibilities for the date as of which to count the benefit.

  1. A prior date certain Date of marital separation, date of filing of the divorce action, or some other stipulated past date.
  2. The current date the evaluator per formed the valuation, date of hearing, date of divorce, or some other present date.
  3. A future date of eligibility for early retirement, date of normal retirement, or some other future date that reasonably may be anticipated.

The third choice the future date benefit contains some complications that should be considered carefully. This approach should be used with caution. The items of concern in preparing an estimate of a future benefit first deal with the date such benefit would commence. As in other issues where variables exist, the evaluator may compute alternative illustrations for benefits that become payable at differing future dates.

Projecting Future Benefits

In estimating or projecting a future benefit, first ascertain if it is a plan in which the benefit formula contains a factor of salary or average salary over a named time period (such as, for example, five-year average pay). If so, the evaluator considers whether to assume that the employee's pay will increase at all between now and the benefit date. If it is assumed that pay will increase with service, the evaluator must select a salary increase assumption.

Salaries could be assumed to increase at a level average annual rate, say 3 percent or 5 percent, or salaries could be assumed to increase for a certain number of future years and then become constant, or a statistical table of salaries could be used based on the occupation or for the industry. In a more sophisticated case, geographical, family, education, and other factors could be considered in projecting the employee's future salary as a component of the future pension benefit.

The introduction of a salary increase factor, sometimes known as a salary scale, will always increase the amount of the pension being measured. This, in turn, will of course increase the amount of the pension's value. The increase in value due to salary projections can be quite dramatic. For example, in the case of a 40 year old employee with retirement age 65, and current annual pay of $40,000, a 3 percent average annual salary scale would generate an estimated five-year average pay of $80,000. Correspondingly, the benefit will double in amount, as will its present actuarial value.

The evaluator must explain and justify the interest rate assumption.

In this example, if a 5 percent average annual salary scale had been used, the five-year average pay would grow to be $120,000. Then, the benefit would triple, and the present actuarial value would increase threefold as well.

Salary increase scales applied to younger employees show even larger results. As an example, an employee currently age 30, with retirement age 65, and current annual pay of $40,000 would have a projected five-year average pay at 3 percent growth of about two and one-half times to be $100,000. The benefit and its value would likewise be two and one-half times larger than the presently existing benefit.

At 5 percent average annual pay increase, the final average pay would have increased by about four and three quarters times to some $190,000.

When using a salary scale in a pension valuation, it is advisable to include in the actuarial assumptions a decrement, or discount, for the possible termination of service before reaching retirement. This mitigates the effects of the assumed salary increase.

In a pension plan that does not use pay in its benefit formula, no consideration need be given to future salary increases, but the evaluator may wish to include possible job advancements or potential future benefit unit increases based on service or worker classifications. In negotiated benefit plans, the evaluator may wish to include a benefit factor for the possibility of increases in benefits in bargaining agreements.

If there is an existing bargaining agreement with a union that includes future scheduled benefit increases, the evaluator may assume that the employee will serve the time covered to attain additional incremental benefits, and may also factor in a termination of service probability.

The question of what benefits to include applies to the timing of the benefit being measured, possible future pay increases, possible or probable benefit unit increases with time, and in some cases knowledge of the status of the employer or the plan. With respect to the latter, if it is common knowledge or otherwise established that the employer is going out of business, filing for bankruptcy, or merging or acquiring another company, these issues could impact on the employee's benefits and the values of the benefits.

Once an employee has reached eligibility age for retirement early or normal additional questions arise. One approach is to assume for value purposes that the employee retires immediately, whether he or she does so or not. The argument is that the employee has the unilateral right to exercise the commencement of the benefit, so that determines its value even if the right is not exercised. The analogy may be made that the innate benefit retains its value just as does a house that has been appraised for market value. The house has that value as property, regardless of whether or when the house is sold.

The contrary argument is that reality must be recognized and if the person is not, in fact, applying for retirement now, then it cannot be properly assumed that an immediate retirement will occur.

A complementary concern is how to treat the benefit when the person has become eligible for retirement but chooses to continue working. There is a point of view that by continuing to work the employee is denying access to the pension by the former spouse. A 20 year old case from California and a more recent one from Nevada treat this subject. In Marriage of Gillmore,' the court ordered the husband, who was continuing in employment beyond his retirement age, personally to pay to his former wife the amount that she would have received had he retired. In Wolff v. Wolff,' there was a similar finding.

These cases may be taken into account in valuations as well as in cases of deferred distribution where a qualified domestic relations order or its equivalent is possible.

COLAs

The subject of cost-of-living increases may be of additional consideration in a valuation of a pension benefit. While uncommon in corporate pension plans, COLA benefits are often found in governmental and military pension systems. In the matter of a pension valuation in the divorce of an employee not yet retired, if it is known that the plan contains a COLA provision, the evaluator may consider whether to include this feature. Naturally, a COLA increases the benefit and thereby increases its value.

A plan may offer different normal retirement ages.

An analysis of the effects of a COLA may be found by an approximation as follows. Assume an active employee, not yet eligible to retire, where it is given that the plan routinely pays a 2 percent annual benefit increase to pensioners. The evaluator uses an interest rate of 6 percent in the valuation of the pension. One possible way to adjust for this COLA is to split the valuation interest rate into two time frames: before retirement and after retirement. For the period of time before retirement, the computation uses the 6 percent interest rate. This is the pre-retirement assumption. Built into the computation for the succeeding time frame, after retirement, the interest assumption becomes 4 percent.

The postretirement interest rate assumption is set equal to the result obtained by subtracting the COLA percentage from the pre-retirement interest rate assumption. In this example, consequently, we have 0.06 minus 0.02 equals 0.04. As a lower interest rate always produces a higher value in pension valuations, the adjustment for a COLA serves to increase the value of the pension, as it should. This subtraction does not always work in every case, but when the figures are available and may be expressed as decimals, it is not an unreasonable approximation.

A more accurate result is obtained for the impact of a COLA by the use of sophisticated computer programs. A plan could contain a COLA schedule by years of retirement, such as no increase for the first two years after retirement, followed by a 2 percent benefit increase for the next three years, then 4 percent for the next five years, and finally 5 percent per year thereafter. The computer can accommodate such a schedule, but it would be more difficult, but not impossible, to handle it by approximate methods.

Conversion or Termination

The validity and continuity of the pension plan itself could be an item to be given some thought in a particular valuation. There has been some tendency for employers to convert their defined pension plans into cash balance plans. If and when that occurs, the potential benefits become totally different than if the pension plan had continued unchanged. When time and cost warrant further involvement in a particular case, the employer's position with respect to the permanency of the pension plan may be investigated.

The possibility of the termination of the plan without its replacement by a successor plan may also become an issue of concern. If the plan is covered by the Pension Benefit Guaranty Corporation (PBGC), the benefits earned by an employee are protected. There is a maximum guaranteed benefit amount, which increases each year. There are conditions and restrictions on the benefits protected and on the class of employees covered. If the evaluator has reason to include the possibility of a plan termination in the pension valuation, further details would be needed and adjustments considered for the value of the pension in question.

If the pension plan is not covered by PBGC, it could be possible that upon a plan termination, part or all of the pension benefits could be lost. This is not likely in any governmental plan, but may be something to think about, for example, in the plan of a one man professional person. For example, a doctor, dentist, lawyer, or other professional maintains a defined benefit pension plan in which the professional is the sole participant. That person may terminate the plan with out PBGC protection, or may dissipate the plan's assets, or make investments of plan funds that decrease in value.

On the positive side, it is not uncommon for a one-man professional's defined benefit pension plan to be over funded. This occurs if the current market value of the plans invested assets exceeds the actuarial liabilities of the plan. The property value of the plan as a marital asset may then be argued to be the total amount of plan assets, not merely the value of the pension benefit itself.

There are sometimes events that could cause an employee to lose all or part of the pension benefit. In a governmental or military pension plan, certain criminal convictions may cause the forfeiture of benefits. If there should be proven embezzlement or other defalcation committed by an employee who perhaps is also a trustee of pension plan funds, that could lead to loss of that person's benefits.

If a person leaves employment, moves away, and cannot be located, the pension plan would have difficulty in paying benefits. If there is a layoff or leave of absence, the involved employee may lose service credits, or may experience less of a growth in the benefit structure than had been anticipated.

In the valuation of a pension benefit as a marital asset, the evaluator or legal counsel for one or both of the parties may wish to inquire about prior pension able service the employee may have had. There could be an old vested pension benefit due to be payable at a future date or at the attainment of a future age. This could be the situation even if the person is not employed anywhere at the present time. A clue to this possibility is the current age and service of the person, if currently employed and in a pension plan. For example, if the party in divorce is a man age 45 with seven years of service, where had he been prior to age 38?

A general question in any divorce case is whether the person has ever been employed (or had military service) prior to the current employment. If so, ask if there is a deferred vested benefit from such prior service. If there is a pension of this kind, it is subject to routine valuation, which in some cases is an easier task than the valuation of a pension of an ongoing employee in a current plan.

End Notes

  1. Marriage of Gillmore, 174 Cal. Rptr. 493 (Cal. 1981).
  2. Wolff v. Wolff, 929 P.2d 916 (Nev. 1996).
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.
DivTips
Pension Analysis Consultants, Inc.

Contact Us For Specific Information About Your Case:

P.O. BOX 7107
Elkins Park, PA 19027
(215) 782-9845

4000 Ponce de Leon Blvd., Ste. 470
Coral Gables, FL 33146
(305) 777-0468

Toll-Free: (800) 288-3675
Fax: (888) 782-9852
E-Mail: pac1@pensionandqdro.com


Mark K. Altschuler
President & Actuary

ASPPA Member

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