Calculating Value for divorces

[wheat66]

I'd appreciate knowing what other actuaries do when asked to calculate the value of DB plan benefit for use in a divorce settlement. I use the PBGC annuity valuation reg. 4044 with a few minor tweaks. Some questions:
Do you value a JS50 annuity or the single-life-related "normal form"?
Do you include the value of the pre-retirement DB?
What mortality table do you use?
Do you include the value of early retirement subsidies?
How do you determine interest rates?
etc.

thanks.

[Malik Shabazz]

My experience in this area has been advising plan sponsors, not participants.

I always encourage my clients to have a QDRO manual in place so that the types of issues you describe are dealt with. I think it's a mistake to select assumptions on a case-by-case basis.

With regard to your questions, I don't think there are any "right" or "wrong" answers. If you're advising plan participants, I suppose there's a good chance you will end up as an expert witness, so (if I were in your shoes) I would establish procedures and stick to them.

P.S. ASOP 34 is a must-read if you're doing a divorce calculation.

[Fuzzy]

Certainly, read ASOP 34, but keep the Code precepts in mind too, especially #2, 4, & 8. That said...

There is a lot of discussion about the proper set of actuarial assumptions. I think that it is important to keep the "market value" of the benefit scheme in mind ("willing buyer/willing seller"). That is, be sure that you, and your audience, understand the differences between all of the options that are available: annuity purchases, §417(e) lump sum minimum requirements, plan lump sum definitions, plan funding requirements, income tax tables (§72), etc..

Your best bet is to define a position that is defensible, and stick with it, no matter which side of the fight you are on. The tricky thing is getting your defense well constructed and being able to apply the defense if your approach is questioned...and it will be!

All of the things you mention are important in the valuation of the benefits available from a pension plan. Keep in mind what column each item goes in though: the value of the pre-retirement surviving spouse benefit (which is lost if no QDRO is issued) goes in the non-employee spouse column, while the value of the normal retirement benefit and the potential pre-retirement subsidy go in the participant column! It might take some fancy figuring to "equalize" the percentage of retirement benefit awarded if the surviving spouse benefit is maintained too. And that early retirement subsidy can be really interesting because it can evaporate if retirement is delayed: is it "fair" to include the subsidy in a settlement that trades a capital asset for the pension? or should it only be applied when there is a QDRO in the offing?

And did I mention Social Security yet?...

[wheat66]

thanks, but I was really asking for specific examples of what people are doing in practice. Here's what I do:

I use the above PBGC reg, but with the up-94 table (since the reg uses the 1983 GAM table which seems a bit old and it contains a margin, doesn't it?). I include the value of the pre-ret db and I value the single-life normal form (but I'm researching whether I should be using the JS50 since a PBGC actuary recently told me they use a JS50 in their valuations (for marrieds, I assume)). I use my own plan's expected early ret age (I work on only one in-house plan); not the reg's. I quote the value with and without the e.r. subsidy (it's an unreduced benefit feature) included and describe what's required to earn it. I use the reg's interest rates, but I'm not sure that completely satisfies ASOP 34 (still researching that). I include the reg's expense loading.

I'd appreciate hearing what other people do or criticisms of what I'm doing.

[wonderer]

if the person has not earned the right to the early retirement subsidy already, i would be very careful about assigning a value

further than that, if the person has not quit work, there is a good chance that the divorce will force more work years to recover the financial hit and therefore your expected retirement age may be out of whack

in a heavily subsidized similar situation in the past, the company decided that for all qdro cases it would present the unsubsidized actual benefit and value based on assuming commencement at the plan's NRA ... further, it added a full explanation of early retirement subsidies, as you suggest, with a caveat that the ex-spouse was not entitled to any of that until the participant actually terminated employment ... this stopped the plan from being forced into the unenviable position of having to explain to a participant that their annuity was severely restricted because on a present value basis the ex's commencement at an earlier date had the effect of "eating into" the total present value of benefits payable (both parties) at actual employee retirement date ... the company was of the opinion that the courts could tell a pension administrator how to split benefits but had no right whatsoever to increase the total benefits payable

personally, i would plan lump sum factors --- my recent experience in QDROs strictly presents annuities and cash values without regard to 417e .. those things fluctuate too much ... if your plan does not provide a lump sum value feature, then i would use 94gar with either a 30 year treasury or a section 7520 mid-term related rate, depending on all facts and circumstances

[wonderer]

if the person has not earned the right to the early retirement subsidy already, i would be very careful about assigning a value

further than that, if the person has not quit work, there is a good chance that the divorce will force more work years to recover the financial hit and therefore your expected retirement age may be out of whack

in a heavily subsidized similar situation in the past, the company decided that for all qdro cases it would present the unsubsidized actual benefit and value based on assuming commencement at the plan's NRA ... further, it added a full explanation of early retirement subsidies, as you suggest, with a caveat that the ex-spouse was not entitled to any of that until the participant actually terminated employment ... this stopped the plan from being forced into the unenviable position of having to explain to a participant that their annuity was severely restricted because on a present value basis the ex's commencement at an earlier date had the effect of "eating into" the total present value of benefits payable (both parties) at actual employee retirement date ... the company was of the opinion that the courts could tell a pension administrator how to split benefits but had no right whatsoever to increase the total benefits payable

personally, i would plan lump sum factors --- my recent experience in QDROs strictly presents annuities and cash values without regard to 417e .. those things fluctuate too much ... if your plan does not provide a lump sum value feature, then i would use 94gar with either a 30 year treasury or a section 7520 mid-term related rate, depending on all facts and circumstances

[wheat66]

Wonderer:
I agree with you about the assumed early retirement age of divorcees; that's one reason why I chose not use the XRA table's age in the 4044 reg.
But I'm assuming age 62 so I think that's pretty reasonable. Is there data regarding divorcee vs. non-divorcee retirement age experience?


aside:
maybe Ellen Schultz (WSJ reporter) should go undercover to see the range of values reported from various actuaries in identical divorce situations. Might be interesting.

[Fuzzy]

OK, let's get a couple of things straight here:

1. If you are the plan enrolled actuary, I do not think that is appropriate at all for you to provide the value of any pension benefit for divorce purposes. The question that you can answer is, "What would the benefit and lump sum distribution be if participant A terminated employment?" You should only answer the question if it comes from the Plan Administrator, and you can only answer the second part of the question if the plan provides for a lump sum distribution. The question can be modified to reflect various alternative termination/retirement dates and "what if's" however. You have a significant conflict of interest if you respond to a question directly from the participant: remember that you have been hired by the PA on behalf of the participants under ERISA rules! You have not been hired by the plan participant!

2. As the plan enrolled actuary, you can advise on the ramification of various QDRO constructs. You have to keep in mind that the QDRO cannot call for paying increased benefits (e.g., no subsidized early retirement benefit if the participant has not actually taken advantage of it themselves; no duplicate survivor benefits; etc.), and you have to be sure that the provisions are actually doable. This is part of your responsibility on behalf of the participants: keep the plan working properly and meeting its obligations. There is nothing inherently wrong about a QDRO that recalculates the allocation to the Alternate Payee if the participant eventually does become eligible for a subsidized early retirement benefit though.

3. If you are hired as an independent advisor to either side, you have a responsibility to provide competent counsel to your client about all of the options available under the plan and QDRO rules. If you leave out an option because "he's not eligible for it if he terminated now", you are not only doing your client a considerable disservice, I would submit that you are skating very close to the malpractice line, and are probably on the wrong side of it.

4. If you are providing independent valuation services, either independent of or in addition to consulting advice, then your valuation methods must be consistent and defensible. Whether you use a market value (willing buyer/willing seller) annuity cost basis or a (I believe erroneous) congressionally mandated minimum lump sum or specific plan rule basis or even an economic or population basis, you have to be consistent and complete in your analysis. It is not necessarily up to you to dictate how your client uses the valuation(s) (watch out for Precept 8 though!), but you do have to be sure that your client knows all of the ramifications of the case they are presenting and where the pitfalls are.

5. If there are several options with widely disparate values (e.g., subsidized early retirement vs. deferred normal retireement), you certainly can advise on a rational method of reconciling the difference and the relevant "value" of the options. This can mean weghting an average somehow if the parties are insistent on using other (possibly more "cash-like") assets as offsets, or discussing the possible QDRO options if no-one can accept a single number as properly representative of the pension value. (The XRA tables are interesting, but the particular case might call for a more subjective analysis of the individual preferences.)

Read and take to heart all of the Precepts of the Code of Professional Conduct, know who your client is, and be consistently complete and honest!