Present Values in Divorce
Present values are used for various reasons. Some courts may simply require that a current value be attached to every individual marital asset, regardless of whether it is being offset from other assets or divided via QDRO.
In cases where there are multiple retirement benefits, the goal may be to minimize the expense of preparing several dividing orders. In that scenario, present values can be prepared in order to calculate an offset of the values of the plans from each other so that just one order is needed. For example, if one spouse has a more valuable defined benefit plan and the former spouse has a few less valuable defined benefit plans, the spouse with the greater valued plan would waive his/her interest in the former spouse’s less valued plans and in return share less of their retirement benefit with the former spouse.
When dealing with plans like the Civil Service Retirement System or certain public retirement plans where employees do not also participate in Social Security, present values are required in order to accurately reflect a Social Security Offset.
A general definition of a defined benefit pension present value is the current value of the future stream of income provided by the pension plan. Domestic Relations courts task divorcing parties to assign a “fair market value” to illiquid goods like real estate and pensions. When Black’s Law Dictionary is consulted, the typical language about a willing buyer and seller is employed along with a qualifier (in the 5th edition) that “Usually the fair market price will be the price at which the bona fide sales have been consummated for assets of like type, quality and quantity in a particular market at the time of acquisition.”
Our traditional present value measures the lump sum, on the date of evaluation, necessary to purchase an annuity which would replace the current accrued pension benefit payable at the earliest unreduced retirement age. The earliest unreduced retirement age is the age at which benefits are not reduced or subsidized. A traditional present value is a snapshot in time and answers the common question: What is this pension worth today?
When this “fair market value” definition is adopted, determining the present value is hardly a speculative exercise, as it is frequently and inaccurately labeled. Instead, the present value will hover in a fairly narrow corridor reflecting current annuity insurance company prices. The PBGC Method is the most common method of determining the cost of an annuity replacement vehicle in lieu of going directly to insurance companies for quotes. At times, obtaining annuity quotes can be difficult. Many companies do not offer individual, as opposed to group, annuity quotes when there is a long deferral period, and others do not like to include cost of living increases. The PBGC Method has remained in the forefront due to its intended purpose of measuring the replacement cost of a defined benefit pension in the private-sector annuity marketplace.
417(e) – PPA Funding
Some evaluators have moved to a method used by plans to calculate the minimum lump sum payout amount for plans offering that option, known as 417(e). Another is a method used by plans to calculate minimum liabilities for plan funding purposes. These methods are beneficial to pension plans because they produce lower values and require less funding as compared to methods like PBGC. Agreeing to a present value based on plan funding assumptions can be detrimental to a former spouse. If they receive cash equal to half of the marital present value using 417(e) assumptions, they would have insufficient funds to purchase an annuity equal to their share of the pension benefit.