Valuation of Pension Benefits

The value of pension benefits is often one of the largest marital assets. When those assets are being divided at the date of divorce, it is very important to be able to place an accurate value on the stream of future benefits from the retirement plan.

The valuation of future pension benefits is quite complex. A pension plan is a promise by an employer to pay an employee a monthly stipend at some future retirement date. Unlike a profit sharing plan, there is not a specific amount of assets designated for the employee. The goal is to determine the actuarial present value of the future cash flows to be paid to the employee. This calculation includes mortality discounts, interest discounts and, if necessary, discounts for vesting.

The Pension Benefit Guaranty Corporation (PBGC) is a federal governmental agency that provides pension benefits in plan terminations. If a company terminates a plan or goes bankrupt, the PBGC ensures that the workers will receive their just benefits. In order to value the benefits from terminated plans, the PBGC has developed tables which are increasingly being used to value pension benefits in divorce cases. The Prospective Actuarial and Mortality Tables contain actuarial tables for immediate annuities at various interest rates. They also include the mortality tables on which the actuarial tables are based.

Example of Vested Pension Benefit

The first step is to calculate the pension benefits which accrued during the marriage. The following chart illustrates the important dates and related time periods for the pension valuation process for Mr. Moore in this example.

Date of Birth	Date of Employment	Date of Marriage	Date of Divorce	Date of Earliest Retirement
6/1/35	9/1/64	5/17/69	8/21/93	6/1/00
		24.2630 years
	35.7479 years
58.2247 years
65 years

Under Mr. Moore’s pension plan, he will receive two and one-half percent of the average of his last five years' compensation for each year of service. His average compensation for the five years preceding divorce is $70,000. His age at date of earliest retirement is 65.

Mr. Moore’s retirement benefits at the date of divorce are then $70,000 x 35.7479 years of service x 2.5%, or $62,558.83.

Next, the portion of the pension benefits attained during the marriage must be determined. This simple calculation is 24.2630 years of marriage ¸ 35.7479 years of service x $62,558.83 pension benefits or $42,460.25/year ($3,538.35/month).

At this point, the Prospective Actuarial and Mortality Tables published by the PBGC must be used to calculate the present value of the pension benefit. The tables show the actuarial value of $1 per year deferred to ages 55 through 70 and payable in equal monthly installments for the expected life of currently healthy males and females at various interest rates. For our example, we will assume that the applicable interest rate is 6 percent. The current interest rate used by the PBGC can be obtained by calling (202) 778-8899.

The tables that we used for a 6 percent interest rate are Set B. Our chart above shows Mr. Moore to be 58.2247 years old at the valuation date. The actuarial values shown in Table 4A of Set B for healthy males are:

58 years old 5.6202
ñ .3727 difference
59 years old 5.9929

The difference of .3737 is multiplied by the amount that Mr. Moore is over age 58, or .2247 years. The product, .0837, (.3727 x .2247) is then added to the age 58 actuarial value of 5.6202 to give an adjusted actuarial value of 5.7039.

Once the actuarial value has been computed, the current value is a simple multiplication of the monthly projected retirement benefits at the date of divorce ($3,538.35) times 12 months times the adjusted actuarial value (5.7039). The present value of the future benefits is $242,188.73.