A Pension Benefit as a Value
By: Marvin Snyder
Pension benefits are widely recognized as property subject to valuation and distribution in marital dissolution.
How to value a pension benefit is a question that occasionally raises some confusion. The predominate view among pension professionals is to use current PBGC (Pension Benefit Guaranty Corporation) rates and factors.
A pension valuation is up to date by using current age and presently prevailing interest and mortality as promulgated by the federal organization - PBGC.
The present value does not represent the mere addition of interest to a prior value. The present value is the worth of the pension today. The pension itself is a frozen benefit for our purposes as of the determination date of the particular jurisdiction. No pay, service nor contributions count after that date. The value of that pension benefit, however, is its current value. The value represents the dollar amount that the pension benefit could be purchased for today as an annuity contract.
When PBGC recently revamped its pension rate structure it also created a two-tier system of rates and factors. In order not to conflict with long-standing Internal Revenue Service regulations relating to pension plan lump sum distributions, PBGC created separate sets - one for lump sums and one for the valuation of pension annuities. In a routine divorce situation where the pension is being valued as property to be distributed either by immediate offset or by deferred distribution, the pension is an annuity creature.
In a regular defined benefit pension plan the pension payments are made monthly over the recipient's lifetime.
This is an annuity. The value of a pension is the value of an annuity. The lump sum rates and factors now segregated by PBGC are for the most part administrative and not practical. Note that a present value is not the same as a lump sum. A present value is a computed value concept, whereas a lump sum is an actual single cash payment which is not a pension as an annuity.
When computing, reviewing or considering PBGC pension values, be sure to determine that the annuity rates have been used, not the lump sum rates.