A pension is one of the hardest earned assets a spouse can own. Divorce professionals are acutely aware of this and take great care to apply the same kind of focus, hard work and attention to detail to value a pension as the plan owner applied to earning it. This blog will be divided into two parts. The first part will explain the nature of a defined benefit pension plan and detail the information required to properly value a pension. The second part, to be published August 13, 2018, will focus on how pension plans are divided during divorce.
Part 1
Defined benefit plans, unlike a defined contribution plan such as a 401K, provide a fixed, pre-established benefit for employees at retirement. The question is how defined benefit plans are valued during divorce. To value your defined benefit plan, Fitch family law attorneys will ask you to provide numerous pieces of information.
1. The pension plan owner.
The pension plan owner is the person to whom the pension benefits will be (or already being) paid and the person upon whose information the value of the pension plan will be calculated. Who the plan owner is, however, does not determine equitable distribution of the pension plan or, in other words, how the pension will be divided between the divorcing parties.
2. The birthdate of the plan owner.
The birthdate of the plan owner is required for the mortality table and to determine when the benefit payments will begin. The mortality table sets out the number of years the party is expected to live and therefore, how many years will be included in the calculation of the present value of the plan and the payout of the benefits of the plan.
3. The gender of the plan owner
The gender of the plan owner is needed for the mortality table used by the defined benefit pension plan. Because a transgender participant may have qualities of both genders, you might want to see what the result would be in the case of either gender, to give you parameters on the potential results. Because of significant differences between expected male mortality and expected female mortality the mortality table used is gender-distinct. Differences between gender-distinct mortality often has an impact on settlement negotiations when one spouse retains a defined benefit plan in exchange for a waiver of rights to other marital assets.
4. Retirement date.
The pension actual retirement date is used to determine whether the pension has started to distribute benefit payments to the plan owner. If the date entered is earlier than the current date, then the participant is already retired, the pension is in pay status, and the participant is already receiving pension income. Nonetheless, present value can be determined even for a pension in pay status.
5. Interest Rate and Cost of Living Adjustment.
You may use the interest rate (discount rate) that is the rate for 20-year U.S Treasury bills which is the assumed safe rate on invested funds. You may also use a different rate. If you are a knowledgeable investor you may wish to ask your family law attorney to use the return on your diversified portfolio. The standard practice, however, is to use a “safe” interest rate for this purpose. The lower the rate, the higher the pension’s value will be. This is because, with a lower rate, there is less “discounting” of future payments.
6. The Date to Evaluate the Plan.
The evaluation date is the date to which the value is discounted. The later the valuation date, the higher the value of the plan will be. This is because there is less discounting. In theory, the evaluation date should be the date on which the employee benefits statement was issued. However, if a lot of time has elapsed since the benefits statement was issued, you will be better off using the current date as the evaluation date. Also, in some situations, the pension is evaluated as of the trial date.
For more information about pension valuations in the context of divorce, or any other aspect of property division in divorce, please contact the divorce and family law litigators of Fitch Law Partners LLP.