Deferred Distribution of Pension or Immediate Offset of Value
By: Marvin Snyder
There are almost evenly balanced arguments for one or the other - to wait until the pension is available to distribute it as a marital asset on an if-as-and-when basis, - or to determine its current present value and offset it against other current marital property.
The question that should always arise in either case is which pension benefit to consider. Three of the possible candidates are listed below:
After the appropriate pension benefit has been determined, the next question in an immediate offset situation is when to value it. The present value of any past, present or future benefit is able to be mathematically determined as of any date - past, present or future. So, you could have the then present value of the accrued pension at, say the date of marital separation. Or, you could have today's current present value of that very same benefit. The dollar amount of the pension may be fixed, but its value increases with time until retirement.
The old past value of a prior fixed benefit is not recommended as a fair measure of the property value of the pension. To arrive at that value, there had to be discounts for mortality and interest. If, as in most cases, some time has passed, the old value is irrelevant. However, the old benefit could be used, if that is the prevailing judicial opinion in a particular jurisdiction, but its real time current present value would be computed.
A current accrued pension may be considered in any case as against the past one. The current pension will be larger, due to pay increases and time since the particular cut-off date. To give it its marital portion, a coverture fraction would be used incorporating the cut-off date.
The current present value would be used for either a prior benefit or a current one, with the marital portion allocated out by the coverture fraction, or the time rule as it is sometimes known.
In cases using deferred distribution, such as by the use of a Qualified Domestic Relations Order (QDRO), often the future benefit is looked to. The reasoning would be that both parties should bear the risk and the reward associated with the potential future benefit.
The risk arises from the possibility that the employee may leave employment by termination of service, death or disability before retirement age. The employee may or may not be fully vested. The pension will not increase past the end of employment, so it will never reach its estimated projected amount.
The reward occurs when the employee continues to work until retirement, with increases in pay and service leading to a larger retirement pension.
As in the case of valuation for immediate offset, the benefit in deferred distribution would be adjusted to a marital portion by use of a coverture fraction.
Whenever a coverture fraction is used, it must be determined correctly and it must be consistent with the benefit involved. For example, if the projected benefit at retirement is used then the denominator of the fraction runs to that retirement date. Likewise, if the current accrued pension benefit is used then the denominator of the fraction ends now concurrently with the benefit service period.