Valuation of Survivor Annuities
By: Mark K. Altschuler
In a recent case, the Superior Court of Pennsylvania has found that a survivor annuity in an ERISA plan is marital property and may be assigned a value, as a pension is valued. In an equitable distribution proceeding when both spouses have pensions, the marital present value of each are included as marital assets. In the simplest case, assuming no other assets, if the marital present values are equal, the pensions offset each other. If the husband's pension has a marital present value of $100,000, and the wife's pension has a marital present value of $75,000, the husband can buy out the wife's interest in his pension with a cash payment of $12,500.
In the Palladino case, (713 A.2d 676, Pa. Super. 1998), the Superior Court has found that the same reasoning applies to the wife's interest as a survivor annuitant of husband's pension, in a post retirement case involving an ERISA pension. While it is true that wife's benefit is contingent upon husband's death, this survivor benefit has a real value, similar to life insurance. In ERISA plans (as opposed to non-ERISA plans, such as government, Railroad Retirement, and public school teachers' plans), a married employee must choose a joint and survivor annuity at retirement, unless this is waived by the spouse. After retirement, this option cannot be changed in almost all ERISA plans, even after divorce. The survivor benefit is based upon the entire retirement benefit, not just the marital component. This was the case in Palladino. The Superior Court stated:
"The pension plan is a private plan subject to E.R.I.S.A. Mark K. Altschuler, the pension actuary, testified that the plan is a defined benefit plan -defined by a formula."
The Court compared the marital part of husband's pension to wife's contingent survivor annuity, which is entirely marital. The survivor annuity is completely marital, since it was acquired entirely during the marriage. The non- employee spouse who is the survivor beneficiary did not earn any portion of this benefit before or after the marriage. One can say that wife will only receive the annuity if husband dies and is survived by wife. This is true. But husband will only receive his pension if he lives. Both contingencies are taken into account in the actuarial calculation of present value of the pension and the survivor annuity. The statistics are built into the present value, and the survivor annuity has a present value, just like the pension. A real life example will illustrate this point. The world's oldest living human with a provable birthdate, now age 118, is Sarah Knauss. Her husband, Abraham Lincoln Knauss (born in 1879), retired from Lehigh County in the 1930's or 1940's with a reduced survivor pension. He died in 1965, and she has been collecting her survivor annuity for over 30 years.
The only significant difference between valuing the pension and valuing the survivor annuity is that the pension valuation is based upon husband's age, and the survivor annuity valuation is based on both husband's and wife's ages. The present value of the pension is based upon the participant living, while the present value of the survivor annuity is based upon the spouse outliving the participant. In the Palladino case, the Superior Court stated this in the following manner:
"The present value of the survivor annuity was calculated at trial by using standard mortality table and the prevailing interest rates. In calculating the value, the actuary from Pension Analysis Consultants, Inc., utilized the concept of a single premium annuity, which is an annuity purchased today in one payment in order to provide a monthly benefit in the future. Therefore, the cost to purchase a pension of $976.00 per month to start now based upon husband's age and life expectancy, calculated at a 6.48% interest/discount rate and using Mortality Table GAM-83, would be $99,850.00. Utilizing the same method, the cost to purchase wife's survivorship interest as a single premium annuity would be $57,480.00 Therefore, the value of wife's survivor annuity is $57,480.00."
Note that a present value is equivalent to the purchase price of a single premium annuity, where the annuity (monthly benefit in the future) is purchased with a single payment today. The single payment is the present value of the annuity (pension). The pension of $976.00 per month is the husband's pension, now in pay status. The present value of this pension is $99,850. When the Court said Utilizing the same method, they meant that PAC utilized the same interest rate (6.48%) and the GAM-83 mortality tables. The difference is that in calculating the present value of the pension, the male mortality table only was used, while in calculating the present value of the survivor annuity, the joint mortality was used.
Once the present value of the survivor benefit has been established ($57,480) this is compared to the marital present value of the husband's pension. To quote from the Superior Court's opinion:
"PAC (Pension Analysis Consultants, Inc.) calculated the present value of Husband's pension... In order to determine the marital portion of Husband's pension, the present value must be multiplied by a coverture fraction, which is marital service divided by total service... Therefore, the marital portion of Husband's pension is $51,140.00."
In this case, the marital present value of the pension is less than the present value of the survivor benefit. There are two reasons for this: the pension is not entirely marital (the coverture fraction is .5487), and the value of the survivor annuity is relatively high, since the wife is 16 years younger than the husband. Hence, the Court decided that there would be no immediate offset regarding husband's pension. A very careful reader may note that .5487 x $99,850 = $54,788 not $51,140. The reason is that separation was before retirement, and the accrued benefit as of the date of separation is $911 per month, with a present value of $93,202. $93,202 x .5487 = $51,140, the marital present value of the pension.
In a similar case with the ages closer, and the service primarily marital, the present value of the survivor benefit will likely be much less than the marital present value of the pension. For example, if the marital present value of husband's pension is $100,000 and the present value of wife's contingent survivor annuity is $25,000, the remainder subject to equitable distribution is $75,000, and the husband can buy out wife's interest in his pension with a cash payment of $37,500.
Thus, the Superior Court of Pennsylvania has found that in a post retirement case involving an ERISA pension where a joint and survivor option was chosen at retirement, the survivor benefit is a marital asset to be valued using the same present value methodology used in valuing a pension.
As of footnote, the Superior Court in this case upheld PAC's use of gender-specific mortality tables, reflecting the market value of pensions and annuities.