The Valuation Date Question
By: Mark K. Altschuler and Marvin Snyder
In a defined benefit pension plan, as of what date should the value of the pension be determined? We discuss here the difference between a "cut-off" date and a "present" date. The cut-off date may be the date of marital separation, the date of filing of the divorce complaint, or the date of the divorce decree. The recommended actuarial approach is to freeze the pension benefit at the cut-off date as if the employee had then terminated service. Then the value of that benefit is determined currently in present real time.
A different - and erroneous - technique is to value the pension at the cut-off date, using the person's age at that time and interest rates that then existed. This "prior" value is then brought forward with interest to the present. But, we know that the employee is alive now, so the prior value with its mortality discount is in error on that point. Further in error is the use of an old interest rate at the cut-off date in the past which is no longer valid. Also a problem is what interest rate to use to bring forward the old value, especially when the cut-off date occurred long ago.
If interest rates were lower at the cut-off date then at present, this method produces higher pension values than the correct valuation. If interest rates were higher at the cut- off date then at present, lower pension values will result.
In either case, the fundamental flaw is the same: the employee is alive, interest rates have changed, and the old value is not valid. A present date valuation is meaningful and appropriate, whereas a cut-off date valuation is a flawed method. There may be a rare case where a property settlement agreement or a court order specifically requires a cut-off date value, which perhaps then must be done that way, but the evaluator should offer an opinion that it is not technically correct.
The correct way to value a benefit in a defined benefit pension plan for distribution as marital property involves two steps: (1) determine the benefit as of a fixed date, and (2) determine its present value currently.
For more information, details and examples, or references to appropriate caselaw, please contact PENSION ANALYSIS CONSULTANTS, INC.
NEW PENNSYLVANIA CASE(s)
A just issued opinion of the Supreme Court finds that early retirement incentives in a pension plan provided after the date of marital separation are marital property [Gordon v. Gordon]. A recent opinion of the Superior Court finds that an enhanced formula in a pension plan due to post-separation service is also marital property [Brown v. Brown].