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Pension Benefit Valuations

In many cases, Pension Plans under consideration in domestic relations practice seem pretty straightforward. In those cases, you have received an accrued benefit statement and, possibly, a summary of the plan from the Plan Administrator. You then need to analyze the value of the benefit and determine if the settlement would be better served with a current or deferred settlement of the pension.

I would submit that things are not as simple as you might believe!

What is the Benefit being valued?

First of all, the Plan may include ancillary or contingent benefits that are of significant value, especially if the participant is not in the best of health, or in a high risk job. And many Plans, especially those sponsored by governmental units or that result from union negotiations, include subsidies that encourage retirement prior to the age at which a terminated participant's benefits might commence. A review of the plan provisions by someone who is familiar with how plans work and has administered, even designed, some of those provisions may be the only way you will fully appreciate the complexities.

What is Marital Property?

Additionally, it may be that you need to consider exactly what makes up the definition of "marital" property. Does the benefit formula improperly influence the result of applying the traditional coverture fraction? Is the benefit accrual rate "front-loaded" or "back-loaded"? Is there a basis for the argument that future compensation increases should be considered martial property? Even if they shouldn't be included, can a deferred settlement be so structured to offset a non-pension asset? Do some of those ancillary benefits effectively allocate assets to the non-participant beneficiary, thereby reducing the need for the transfer of other assets? Can that allocation be preserved if the parties are not legally married? For some additional comments, check out some of the Frequently Asked Questions.

What is the valuation procedure?

Once you determine what benefits are being included in your analysis, does your valuation procedure provide for their proper inclusion? Some "experts" purport to provide a pension valuation by assuming that a participant will live to a certain age and simply apply an interest discount to payments through that age. This "life expectancy" calculation is a nice approximation of a value and may be good for initial discussion, but it cannot recognize all of the contingencies, and certainly none of the subtleties of most pension programs. Only a procedure that analyzes each potential future payment, both as to amount and reason for payment, can properly recognize all of the contingencies. An actuarial calculation can include the payments due as long as a participant survives and can account for payments to be made if someone else is to receive a death or survivor benefit.

What does all of this mean?

You may not need to hire the expertise necessary to fully analyze and evaluate the various optional and ancillary benefits that make up the interests of the Participant and the non-Participant Spouse in the Plan, but if you believe that considering all of the contingencies is important, I believe that my pension and actuarial experience can be of great assistance. If, however, you believe that there are complications that can be safely ignored, and you don't need a full analysis, my actuarial calculations are still available. Check out my Application for Simplified Actuarial Valuation. or a text text file copy (simply print the file if it meets your needs!)

If the form submission or linked file isn't sufficient (or didn't work), and you would like to receive a copy of the Application for Simplified Actuarial Valuation, or just want to start a dialog about actuarial valuations and expert advice, just let me know at my e-mail address: actuary "at" galactser.com.

If you're not ready to officially ask for a review or valuation, the representative annuity rate table may be helpful. (Please let me know if it is helpful, or if you have any suggestions for improvement (e.g., increased range of ages; different layout, comments or instructions; etc.). Please keep in mind that it can't get too complicated or involved since it does need to be updated periodically.)

What about reallocating the benefit/value?

After you have determined the value of the pension, you may then want to assign some of that pension to the non-participant spouse if you cannot account for the marital asset through a redistribution of the other assets. I can help draft a court order to accomplish this. Although they go by different names in different jurisdictions, the orders are generally consistent with the requirements of the qualified pension type: qualified domestic relations orders (QDRO's). The orders can be very complicated, and it is very easy to miss something important if you are not familiar with how the plan works (unless, of course, you want to miss it!). It can be very messy if you have to fight over a misunderstood provision and go back to court to amend the order. I'll even help draft the settlement agreement provison to attempt to ensure that everyone knows what happens when each spouse dies so there are no surprises about "lost" benefits. (For one example of what can happen if there is a misunderstanding, see the Maine Supreme Judicial Court decision on Greenwood.)

BTW, what is the definition of value?

In my opinion, the present value of a pension benefit is the amount that would be necessary to provide that benefit on the open market. Since the only market for a series of future payments is that provided by an annuity contract from an insurance company, I normally base my calculations on the current actuarial assumptions used by the Pension Benefit Guaranty Corporation to value annuities from pension plans which terminate with insufficient assets. The PBGC is required to match the market in this instance, and I rely on them to do the surveys to track the market. This does, of course, essentially assume that the contract is underwritten on a fairly liberal group basis, rather than on the (potentially) more conservative individual basis for which one person would normally be eligible. I also normally ignore any expense loading since we are usually looking only for the value of the benefits, and not trying to account for the profit requirements of an insurer. If circumstances warrant it, such as with extraordinary health situations, the actuarial method allows for easy adjustments of any of these factors.

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Michael E. Gallagher
d/b/a Gallagher Actuarial Services
P.O. Box 297
Sebago, ME 04029-0297
(207) 650-6405
e-mail: actuary "at" galactser.com
World Wide Web URL:
http://www.galactser.com/
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