Valuation Strategies

16.12 Valuation Strategies

Depending on the characteristics and provisions in a particular pension plan with respect to all of the factors discussed above, the employee and nonemployee spouse may be better or worse off with an immediate offset or deferred distribution approach. Counsel should consider various valuation strategies to maximize the client's position. For example, if the nonemployee spouse needs upfront cash as part of his or her property distribution and there are no available early retirement enhancements or subsidies in the plan, then immediate offset is the best approach because the nonemployee spouse receives the cash he or she needs without losing early retirement enhancements with a deferred distribution. If the pension plan will allow the employee to delay retirement indefinitely, as does the federal Civil Service Retirement System, then an immediate offset approach may be better for the alternate payee so he or she is not subject to that delay. An alternative is to draft the QDRO type order to remove the financial incentive for the participant to delay retirement by increasing the benefit to the alternate payee for each year that the participant delays. The present value of the alternate payee's benefit remains the same, and the participant no longer profits by his or her delay. A specific explanation and illustration of this approach can be found in Chapter 17.

With respect to early retirement subsidies, the alternate payee's counsel should negotiate for the inclusion of a provision whereby the alternate payee receives a pro-rata share of that subsidy. Obviously, the participant's counsel should object. Much depends on the case law in the particular jurisdiction. However, if the jurisdiction's case law allows the alternate payee to receive a share of the subsidy, it would be a mistake for divorce counsel to fail to include such a provision in the QDRO. The same analysis applies with respect to COLAs. If a jurisdiction allows the alternate payee's participation in the COLA in the QDRO, then divorce counsel should include such a provision in the QDRO. The COLA should be less objectionable because that is an increase to the pension benefit that is awarded across the board to all employees based on an inflation index and has nothing to do with the specific work efforts of the employee after divorce. This may not be the case with early retirement incentives or enhancements. For example, the employee may need to reach a threshold number of years of service to earn an early retirement subsidy. If the employee has worked, for example, 17 years through the date of separation and does not earn the early retirement subsidy until he works three additional post-separation years, should the nonemployee spouse benefit from that early retirement subsidy which was earned, in part, with post-separation service? The nonemployee's counsel should argue that 17 out of the 20 years of service were earned during the marriage and the employee could not have earned the subsidy without those 17 marital years. A reasonable compromise would be to prorate the early retirement subsidy so that seventeen/twentieths (17/20) of the benefit is community or marital property subject to division between the spouses. Often, it is not clear whether the subsidy was earned with marital or post-marital years of service. What if the company announces an early retirement subsidy in the year following the divorce and the subsidy is awarded without regard to years of service? The employee spouse will argue the benefit did not exist at the time of the divorce and the nonemployee spouse should receive no portion of that subsidy. The nonemployee spouse will argue that the subsidy is not being granted because of any work effort by the employee during or after the marriage, but that this is an across-the-board increase in pension benefits. Since she is receiving a percentage of the pension benefits under the existing QDRO, she should receive the same percentage of the newly enhanced benefit. These are some of the more difficult valuation strategies that can arise in a divorce case. The facts and circumstances of each case must be carefully scrutinized in light of the existing legal precedent in the jurisdiction. There is not always a simple answer or solution for each case. That is why many pension disputes have been litigated to the states' highest courts.

These considerations and decisions are summarized in the flow charts in Exhibit 16-4A (ERISA plans) and Exhibit 16-4B (Non-ERISA plans). Subsequent chapters address the specifics of a variety of specialized pension plans, such as Fortune 500 company plans (e.g., Sun Oil Co. and SmithKline Beecham), the federal Civil Service Retirement System, and the military retirement system.

EXHIBIT 16-4A QDRO Flow Chart for ERISA Plans

Legend
CF = Coverture Fraction
Imm. Off. = Immediate Offset
cutoff ben = benefit accrued at cutoff date
ret ben = benefit accrued at retirement
ER = early retirement
AP = Alternate Payee
P = Participant
REA = Retirement Equity Act

EXHIBIT 16-4B QDRO Flow Chart for Non-ERISA Plans

Reprinted with permission. 2007, Aspen Publishers, Inc., from Valuing Specific Assets in Divorce, edited by Robert D. Feder.

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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.