When Present Values Are Needed
Some courts will require that a value be assigned to every asset in a divorce. When it comes to the defined benefit pension plan, we can prepare a present value report that provides the current value of all future pension payments.
Even if the court does not require a value, there are times when a present value report is needed. For instance, if the parties intend to offset assets or if a Social Security Offset needs to applied.
Our Present Value Report
After reviewing the biographical and plan information, we prepare a comprehensive actuarial present value report. This provides the current value of the future stream of income from the pension, discounted for mortality and interest. We report the total present value and also determine the portion earned during the marriage using a traditional coverture fraction.
Our methodology mirrors the method of the Pension Benefit Guaranty Corporation (PBGC), the largest and best-known arbiter of group annuity pricing. Established in 1974 by the Employee Retirement Income Security Act (ERISA), it is directed by the Secretaries of Labor, Treasury and Commerce to safeguard the private pensions of American workers. The PBGC mandates specific mortality tables and interest rate assumptions for terminating plans in order to make an accurate assessment of its liability exposure. In its December 6, 2005 publication 05-32, the American Society of Pension Professionals and Actuaries (ASPPA) described the PBGC methodology as a “market-based approach to valuation.”
A market-based present value approximates the cost to buy a comparable stream of guaranteed income in the group annuity market. This definition is strongly supported by case law, treatises in the field including the Actuarial Standards of Practice Rule No. 34, general practice of other large commercial present value preparers across the country and our own comprehensive survey of group annuity prices versus PBGC present values.