Pension Valuation with Divorce Financials

Pension Value in Divorce Cases

Family law attorneys are often faced with a situation in which the value of a pension plan is a significant asset for the divorcing parties and they are required to compute the present value of the pension. A “defined benefit pension” promises to pay a monthly benefit starting at a certain retirement age of the participant until death. Most of these plans are generally 100% employer-funded and the monthly benefit is determined upon years of service and the annual income of the participant. View a sample Pension Valuation Report.

Common Lifestyle Analysis Problems

One common problem arises when one party, in contemplation of divorce, unilaterally alters the historical spending practices of the family. For example, if the supporting spouse moves out of the marital residence and refuses to provide adequate support for the spouse and dependent(s), the action may artificially reduce expenditures. In situations where spending is inconsistent with the historical marital standard, the periods of unusual expenditures should be excluded from the analysis. As an alternative, the lifestyle analysis results will provide data that is accurate, if you look at financial records in an earlier time frame to calculate spending more indicative of the marital lifestyle.

Divorce Financials software includes an easy to use pension valuation module.

To compute the value of pensions for divorce settlements, the user enters the following data values:

  1. Pensioner’s basic information such as name, date of marriage, gender and date of birth.
  2. Equitable Distribution Cut-Off Date: The cut-off date is used to calculate a coverture factor and typically is the date the divorce petition was filed, generally a good estimation of the couple’s separation date.
  3. Date of Valuation: Present value of pension is calculated as of this date. The later the pension valuation date, the higher the pension value will be.
  4. Date of Plan Entry: This date is also used to compute the coverage factor. Enter the date pension holder started participation in the retirement plan.
  5. Normal Retirement Age: The age when the participant is eligible to retire and begin collecting pension payments.
  6. Monthly Pension Amount: The value should be obtained from the pension plan administrator.
  7. Annual Cost of Living Adjustment (if applicable): This value should be obtained from the pension plan administrator.
  8. Pre-Retirement Pre-Tax Interest Rate: Once a lump-sum pension value at the date of retirement is calculated, the rate is used to “discount” the lump-sum value to compute value at the valuation date. The higher this value is, the lower the valuation will be at the pension valuation date.
  9. Post-Retirement Pre-Tax Interest Rate: This value is used to discount each year’s pension value up to the date of retirement. You may keep the interest rate the same as pre-retirement or use a different value.
  10. Life Expectancy Table to Use:
  11. Coverture Factor: This is the fraction of the pension’s value that accrued during the marriage. The factor can be calculated automatically or the user can enter it manually.
  • RP-2000: A table that is generally more accurate and reflects a broader population-wide average. The data for this table comes from the lives of those in the private sector and includes more blue-collar workers and others in “less-healthy” populations. This table is gender-specific and generationally adjusted.
  • UP-94: A table based mostly on the lives of federal civil servants and tends to give slightly higher results.
  • Gender Specific: On average, women tend to live longer than men. To reflect this, mortality tables are different for women and men. In some cases, you may be required to use a unisex table that averages women’s and men’s mortality.
  • Generationally Adjusted: Due to advances in society, on average, people are living longer and longer. As a result, someone who turns 65 in 2020 has a longer life expectancy than someone who turned 65 in year 2008. All of our tables are generationally adjusted and use “Projection Scale AA” adjustment algorithm that is published and recommended by the American Society of Actuaries.

The marital portion of the present value of pension is computed in two steps:

1. First converting the stream of monthly pension income after retirement into an equivalent lump-sum pension value at the retirement age (”value at retirement“).

  • Value of “cost of living adjusted payments” in each retirement year is calculated back to the retirement age discounted by “post-retirement interest rate” and adjusted for “Probability of surviving to this year from retirement age” based on projected data from mortality table selected.
  • Then the value of each post-retirement year as computed above is totaled and that becomes the pension value at retirement.
  • Next, pension value at retirement is converted into pension value at valuation and the marital portion is computed.
  • To compute the marital portion value, we discount value at retirement by pre-retirement interest rate and adjust it by “probability of surviving to the retirement from valuation age to retirement”.
  • Coverture Factor is multiplied with the pension value at valuation to compute Marital Portion.
  • The family law software Pension Value Calculator helps estimate current value of future divorce pension payouts.

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