Pension Appraisers, Inc.: Pension FQAs

Pension FAQs

FAQs General
1.	Why do I need to know the value of my pension?
2.	What is the Immediate Offset Method?
3.	What is the Deferred Distribution Method?
4.	If it is decided that the pension benefits will be divided using the Deferred Distribution Method, is it necessary to determine the value of the benefits?
5.	Which method of distribution is better, the Immediate Offset Method or the Deferred Distribution Method?
6.	When valuing retirement benefits (either defined benefit or defined contribution plans) are the tax consequences associated with such benefits incorporated into the analysis?
FAQs for Defined Benefit Plans
7.	What is a defined benefit plan?
8.	What is present value?
9.	How is a present value appraisal used in the divorce process?
10.	Are there different methods of determining the present value of a pension? How are the methods different?
11.	Which method will furnish the highest/lowest value?
12.	Which method is the most valid?
13.	What is the "Valuation Date"?
14.	What is meant by the "Cut-Off Date," "Date of Classification" or "Date Marriage Ended"?
15.	What is meant by "Normal Retirement Age"? What is meant by "Earliest Retirement Age"?
16.	What is an "Accrued Monthly Pension Benefit"?
17.	What is a cost-of-living adjustment (COLA)?
18.	What is meant by "vested"?
19.	Does an "unvested" pension have value for purposes of equitable distribution?
20.	How is a disability pension treated during the division of assets in a divorce?
21.	Would an employee’s status as "disabled" effect the present value process?
22.	If I participated in my pension plan before I got married, will this be taken into consideration during the present value analysis?
23.	What is a coverture fraction?
24.	Does a coverture fraction always use time as its benchmark to determine what portion of the pension accumulated during the marriage?
25.	How are Social Security Benefits handled in the divorce process?
26.	What if I do not contribute towards social security, but instead make a contribution towards my pension?
27.	Will every appraiser arrive at the same present value for an individual’s pension benefits?
28.	How does a difference in interest rate effect the present value?
29.	How does a difference in retirement age effect present value?
30.	How does use of a Cost-of-Living Adjustment effect the analysis?
31.	How does an individual’s vesting status effect the present value?
FAQs for Defined Contribution Plans
32.	What is a defined contribution plan?
33.	How is a defined contribution plan valued for division in a divorce?
34.	Is one method more or less accurate or acceptable than another?

1. Why do I need to know the value of my pension?

If you intend to divide the retirement benefits using the Immediate Offset Method, it is necessary to establish a value for the pension.

2. What is the Immediate Offset Method?

The Immediate Offset Method of dividing a pension compares the value of the pension to the value of the other marital property. The employee will end up keeping his/her pension, and the spouse receives another asset of equal value in lieu of his/her interest in the pension. If the value of the pension is unknown, it is impossible to use the Immediate Offset Method to come up with an accurate property division.

3. What is the Deferred Distribution Method?

The Deferred Distribution Method of dividing a pension provides for the division of benefits to take place at a later date, when the benefits are actually being paid by the plan. This type of distribution is usually accomplished using a court order or Qualified Domestic Relations Order (QDRO).

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4. If it is decided that the pension benefits will be divided using the Deferred Distribution Method, is it necessary to determine the value of the benefits?

In most cases, the answer would be no. If it is possible to divide all of the other property of the parties, and the pension is being distributed at a later date, when benefits are actually paid by the plan, it is unnecessary to know the value of the benefits at the time of the divorce. Since the benefits are not being distributed at the time of the divorce, knowing the value at such time would not be required in order to ensure a proper division of property. However, in some cases part of the pension will be included in an Immediate Offset and part will be distributed using a QDRO at a later date. In this case, knowing the value of the pension would be essential. Therefore, it is sufficient to say that in the typical case it is not necessary to know the value of the benefits if such benefits are to be divided using a Deferred Distribution. However, if you are not dealing with the typical case, certain calculations of value may be necessary in order to properly divide the benefits between the parties.

5. Which method of distribution is better, the Immediate Offset Method or the Deferred Distribution Method?

Both methods have their strengths and weaknesses. The appropriate method to be used in a particular case depends upon the circumstances involved in that case.

6. When valuing retirement benefits (either defined benefit or defined contribution plans) are the tax consequences associated with such benefits incorporated into the analysis?

When benefits are distributed by the plan to the employee, taxes will be assessed just as they are against a regular pay check. Therefore, it makes sense that taxes should be examined when valuing future retirement benefits. However, how much tax is appropriate and at what tax rate? Since the answers to these questions are presently unknown, most appraisers and courts, alike, are wary of applying a reduction to the value for future taxes.

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FAQs for Defined Benefit Plans

7. What is a defined benefit plan?

A defined benefit plan provides a retiree with a monthly payment beginning at retirement for the remainder of the retiree’s lifetime. The benefit that is payable upon retirement is calculated using a formula. Such formula is defined within the context of the Plan. A defined benefit plan is the type of plan most commonly thought of when talking about pensions. It is paid monthly for the lifetime of the retiree starting at retirement.

8. What is present value?

Present Value is the current worth of a stream of income to be received in the future. In basic terms, the present value, as it applies to pensions, describes the amount of money which would have to be invested or set aside by the pension plan today, so that sufficient funds would be available to pay out the pension amount throughout the employee’s years of retirement. In order to determine present value, the appraiser will employ an appropriate discount rate and estimate the length of time the payments will be received by the pensionholder.

9. How is a present value appraisal used in the divorce process?

An estimate of the present value of a pension is essential when divorcing parties are attempting to divide the benefits using the Immediate Offset Approach. The present value of the pension can be compared to the other marital assets subject to distribution in an attempt to make a "trade-off." In such a case, the pensionholder would keep his/her pension and the spouse would take another marital asset of equal value to balance off the distribution. In order to be in a position to make a "trade," the value of the assets must be known. The present value report presents the current value of the pension for this purpose.

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10. Are there different methods of determining the present value of a pension? How are the methods different?

Yes. There are three commonly recognized methods for determining the present value of a defined benefit plan for use in equitable distribution. These methods are referred to as: (i) the Life Expectancy Method; (ii) the PBGC Actuarial and Mortality Tables Method; and (iii) the GATT Method. Pension Appraisers, inc. offers all three of these methods of valuation to their clients.

A brief description of the methods and their differences follows:

The Life Expectancy Method uses life expectancy tables (derived from Group Annuity Mortality Tables) to measure the employee’s projected lifespan, and the rate on A-Rated General Obligation Municipal Bonds as a discount rate.

The PBGC Actuarial and Mortality Tables Method uses Group Annuity Mortality Tables to measure the employee’s projected lifespan, and the interest rates published and used by the Pension Benefit Guaranty Corporation as discount rates.

The GATT Method uses Group Annuity Mortality Tables to measure the employee’s projected lifespan, and the 30-Year Treasury Bond rate as a discount rate.

As you can see, the differences in these methods lies within the tables used to measure the projected lifespan and the interest rates used to discount to present value.

11. Which method will furnish the highest/lowest value?

There is no general rule of thumb that one method always produces a higher or lower value. There is an inverse relationship between interest rates and present value - the higher the interest rate, the lower the present value, and vice-versa. Since the interest rates utilized in all three methods fluctuate, any one can be higher or lower than any other one at any given time. Therefore, any of the three methods can generate a higher or lower present value on any given day.

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12. Which method is the most valid?

Each of the methods are valid, and would be accepted in a court of law. They are basically just different ways of looking at the same issue. However, one method may be preferred in your state or county.

13. What is the "Valuation Date"?

The valuation date dictates the interest rate to be utilized in the analysis. For example, if the GATT Method of valuation is being used to generate a present value, and the valuation date is August 1, 2001, the interest rate utilized would be 30-Year Treasury Bond Rate in effect in the market on August 1, 2001. By using the interest rate in effect on the valuation date, the present value of the benefits corresponds to the value of the dollar (in the market) as of that particular date.

14. What is meant by the "Cut-Off Date," "Date of Classification" or "Date Marriage Ended"?

For purposes of the present value analysis, the cut-off, date of classification or date the marriage ended date refers to the date that marital property rights relative to the pension terminate. This date can be the separation date, the actual date of divorce, or some other date that may be mutually agreed upon by the parties. This date is different in every state, and is usually dictated by case law.

15. What is meant by "Normal Retirement Age"? What is meant by "Earliest Retirement Age"?

The normal retirement age of an employee is the age, based upon the terms of the plan, at which such employee could retire and begin receiving an unreduced benefit based upon the years of service earned by the employee as of the cut-off date. Normal retirement age may vary from plan to plan. Further, some states prefer that the employee’s earliest retirement age be used in the analysis of present value. An employee’s earliest retirement age is the earliest age at which the employee can retire and receive a reduced benefit. This age may also vary from plan to plan.

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16. What is an "Accrued Monthly Pension Benefit"?

The accrued monthly pension benefit is the amount that would be paid to the employee as a monthly pension benefit based upon the years of service earned by the employee as of the cut-off date payable when the employee reaches retirement. In other words, assuming the employee terminated his/her employment as of the cut-off date, the accrued monthly benefit is the amount that would be paid as a pension when the employee retires. Most plans have the ability to calculate this amount as of any cut-off date requested. Further, in many cases, employees are given annual benefit statements that illustrate their accrued monthly pension benefit as of December 31 of the given year.

17. What is a cost-of-living adjustment (COLA)?

A cost-of-living adjustment is a small incremental increase made to a retiree’s monthly pension benefit in an attempt to keep his/her benefits in line with inflation. COLA increases are not applicable to every plan. Therefore, adjustments for COLAs would only be applicable in a present value analysis of benefits that have COLA adjustments guaranteed under the terms of the plan.

18. What is meant by "vested"?

All plans have vesting requirements. Such requirements dictate the period of time an employee must be employed before being guaranteed retirement benefits upon retirement. For example, under some plans the vesting requirement is 5 years. Therefore, an employee must work for 5 years before earning a guaranteed pension under the Plan. If the employee terminates employment after 6 years, such employee will still be eligible to receive a pension based upon the 6 years he/she was employed. However, if the employee terminates after 4 years, all benefits are forfeited.

19. Does an "unvested" pension have value for purposes of equitable distribution?

In most states, the answer is yes. If an employee’s benefits are not fully vested as of the cut-off date, the present value of such benefits would be reduced to reflect the probability that the pension will not vest.

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20. How is a disability pension treated during the division of assets in a divorce?

All states handle the issue of disability differently. In some cases disability is viewed as replacement of income, and therefore, not considered an asset until such time as it is converted to a retirement benefit. Some states do not make this distinction, and view the entire disability benefit as property. The specific standards set forth in a particular state should be examined before making a decision relative to handling disability.

21. Would an employee’s status as "disabled" effect the present value process?

Yes. The present value would be calculated using special tables. Since a disabled person’s projected lifespan may not be the same as a healthy person’s life expectancy, special tables would have to be used which relate to people with disabilities.

22. If I participated in my pension plan before I got married, will this be taken into consideration during the present value analysis?

Whether or not benefits earned prior to marriage are included or excluded in the present value process depends upon the type of property model followed in a respective state.

In an All property Model state, typically, all property owned by one or both parties on the cut-off date is included in the marital estate, even if some of that property was actually acquired prior to marriage.

In a Dual Property Model state, only that property which was actually acquired during the period of marriage would be included in the marital estate. Therefore, any portion of the pension which was earned prior to the marriage would be excluded during the present value analysis. Typically, the appraiser will apply a coverture fraction against the present value of all benefits earned by the employee in order to differentiate that portion which was actually accumulated during the period of marriage.

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23. What is a coverture fraction?

A coverture fraction is a tool used by an appraiser to separate that portion of the benefits which was earned during the marriage, from that portion of the benefits which were earned outside of the period of marriage. The coverture fraction represents that portion of the value of the benefits attributable to the marriage. The numerator of the fraction represents the total period of time the pensionholder participated in the plan during the marriage, and the denominator is the total period of time the pensionholder participated in the plan as of the cut-off date. The following example illustrates the mechanics of a coverture fraction:

Marriage Date: June 30, 1978
Date Employment Started: January 30, 1970.
Cut-Off Date: June 30, 1998.

The total number of years of participation in pension plan during the marriage equals 20 (from June 30, 1978 to June 30, 1998).

The total number of years of participation in the pension plan as of June 30, 1998 equals 28.5 (from January 30, 1970 to June 30, 1998).

Therefore,	20.00 Years =	0.7018 or 70.18%
	28.50 Years

This means that 70.18% of the present value of the pension as of June 30, 1998 would be attributable to the marriage. For example: The total present value of the employee’s pension plan was $100,000.00 as of June 30, 1998. The $100,000.00 would be multiplied by 70.18% to give a value for the marital portion of $70,180.00.

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24. Does a coverture fraction always use time as its benchmark to determine what portion of the pension accumulated during the marriage?

No. In some cases measuring the period of time the employee participated in the plan against the total period of time the employee was a participant in the plan as of the cut-off date does not provide an accurate picture of the benefits which were accumulated during the marriage. Based upon the mechanics of the plan itself, it may be more appropriate to use contributions or actual service credit, instead of months or years. For instance, military reserve members receive a pension based upon the number of points earned during their service with the reserves. Due to the nature of being a reservist, more points may be earned in one year than was earned in another. Therefore, a coverture based upon the number of points earned during the marriage would provide a much better picture of the marital property portion of the benefits than just using the number of years the parties were married in the coverture.

25. How are Social Security Benefits handled in the divorce process?

According to federal statute, social security benefits are not typically included in the division of assets at the time of divorce. This is due to the very nature of social security. When social security benefits become payable, the social security administration will give divorced spouses credit for each others social security benefits. Such calculations are built into the process of calculating an individual’s social security benefit. If credit is given at the time of the divorce for a difference in social security benefits, and then again at the time social security is payable, division of these benefits will be made twice.

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26. What if I do not contribute towards social security, but instead make a contribution towards my pension?

The large majority of those in the workforce pay into social security. However, there is a small population of those who instead of paying into social security, make a contribution towards their pension benefits. These individuals include members of the Civil Service Retirement System, certain policemen and firemen, some teachers and certain state employees. Whether you contribute towards social security or towards your retirement benefits depends upon the provisions set forth in your pension plan.

If you do not contribute towards social security, you may want to consider having a social security offset analysis done on your pension. In basic terms, this analysis will separate your actual pension benefits from what could be considered your "hypothetical social security benefit." This will enable you to remove any benefits you will receive in lieu of social security from the picture, thereby, providing a value of just the pension benefits to be used in the division process.

Certain courts have recommended that such an offset is appropriate, and other courts are still examining this issue.

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27. Will every appraiser arrive at the same present value for an individual’s pension benefits?

No. If appraisers use different assumptions, they will arrive at different answers. Following is a list of assumptions, that if different, can drastically effect the present value conclusion:

Valuation Date/Interest Rate
Date of Birth
Cut-Off Date
Normal Retirement Age/ Commencement of Benefits
Accrued Monthly Benefit
Cost-of-Living Adjustment
Vesting Status
Method of Valuation

The effect of a difference in some of these assumptions is obvious. For example, if one appraiser assumes you are older or younger than you really are, your projected lifespan will be different. Further, if the cut-off date is different, it is assumed that marital property rights stop at two different dates. Therefore, you will obviously get two different answers. If different monthly benefit amounts are used in the analyses, the answers generated will be different. However, some of the other assumptions are more effected by the mechanics of the mathematics. Therefore, the effect of the difference is not as obvious.

28. How does a difference in interest rate effect the present value?

A higher interest rate will result in a lower present value, and vice-versa. This is due to the principles of Time-Value-of-Money. Therefore, if two appraisers use two different valuation dates, thereby employing two different interest rates, they will arrive at two different answers. This is true even if all of the other assumptions made by the appraisers were the same.

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29. How does a difference in retirement age effect present value?

The closer an individual is to retirement, the higher the resulting present value, and vice-versa. This is also due to the principles of Time-Value-of-Money. Therefore, if two appraisers use two different retirement ages, they will arrive at two different answers. This is true even if all of the other assumptions made by the appraisers were the same.

30. How does use of a Cost-of-Living Adjustment effect the analysis?

Use of a cost-of-living adjustment in a present value analysis reduces the interest rate employed. As mentioned earlier, a lower interest rate will result in a higher present value, and vice-versa. Therefore, if one appraiser uses a COLA in their analysis, and the other does not, they will arrive at different answers. This is true even if all of the other assumptions made by the appraisers were the same.

31. How does an individual’s vesting status effect the present value?

If it assumed by one appraiser that all benefits of the employee are fully vested, but the other appraiser makes a reduction in value because it is assumed that such benefits are not fully vested, they will result in different answers. This is true even if all of the other assumptions made by the appraisers were the same.

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FAQs for Defined Contribution Plans

32. What is a defined contribution plan?

A defined contribution plan is a retirement plan whereby the employer, employee or both make contributions towards an individual account established on behalf of the employee. Such funds can be invested, and upon retirement, the employee will receive either a lump sum payment of the amount held in the account or such balance will be converted to a monthly annuity payable for the lifetime of the employee. Examples of some defined contribution plans are as follows:

401(k) Plan
Savings and Investment Plan
Profit Sharing Plan
Money Purchase Pension Plan
Employee Stock Ownership Plan (ESOP)
Tax Reduction Act Stock Ownership Plan (TRASOP)

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33. How is a defined contribution plan valued for division in a divorce?

The value of a defined contribution plan is the total account balance maintained for an individual under the Plan as of any given date. Certainly the manner in which such an account is viewed as property will depend upon the property model followed in your state. Depending upon the property model followed, the entire account balance could be subject to division or, depending upon the circumstances of the employee’s participation, only part of such account could be subject to division.

If an individual began participating in the defined contribution plan prior to marriage, the entire account balance maintained by the plan on his/her behalf may not be considered marital property. In this case it is the job of the appraiser to determine what part of such account balance is attributed to the period of marriage and which should remain the sole property of the employee.

Pension Appraisers, Inc. offers three methods of determing the portion of a defined contribution plan which accumulated during the period of marriage. It is important to remember that determining such a value is not always an exact science. The value of these accounts can change on a daily basis and some individuals may have participated in such plans for many years. Following is a brief explanation of the three methods:

Segregation Method: The account balance on the Date of Marriage, plus all interest and investment growth attributable to these monies is subtracted from the account balance on the Date the Marriage Ended/Cut-Off Date. The difference is the value of the account subject to division. This approach assumes that any growth in pre-marital account balance which occurred during the marriage is considered separate property. Most Dual Property Model states view this growth as separate property. However, this is not true for all Dual Property Model states, and should be researched before using this method.

Subtraction Method: The account balance as of the Date of Marriage is subtracted from the account balance as of the Date the Marriage Ended/Cut-Off Date. The difference in the account balances is the value of the account subject to division. This approach assumes that any growth in the pre-marital account balance which accumulated during the marriage is considered marital property. Only a few Dual Property Model states view this growth as marital property.

Coverture Method: The account balance as of the Date Marriage Ended/Cut-Off Date is multiplied by a coverture fraction to determine the value of the account for equitable distribution.

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34. Is one method more or less accurate or acceptable than another?

The method of valuation chosen would certainly depend upon the property model followed in a particular state. The Segregation Method can be very complicated, and typically requires a substantial amount of information about the account in order to perform the analysis. The Subtraction Method and the Coverture Method are much less complicated and do not require the volume of information about the account that is required for the Segregation Method. As stated before, determining the value of a defined contribution plan is not an exact science. It is important to understand the method of valuation being utilized. Understanding the mechanics of the method will help you understand the value being presented

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