My September 4th post listed the two methods of dividing pensions in divorce and what information was needed to make the division. The “If, as, and when” method is the one most used by the court as it is relatively simple and judges do not need to hear conflicting testimony by valuation experts.
Once you have determined that there is a high probability that a trade can be made, the pension plan or plans should be valued. A valuation can done by a local Actuary, a CPA, a CDFA™, or on line. The costs and end product vary by preparer and there can be extreme variations in the valuations. Before you make a choice, consideration must be given as to how many valuation points (in time) you need, how the reports will be used (mediation, litigation, collaborative), and what your budget is.
Pension Plan valuation is a mix of art and science. Variable input includes the interest (discount) rate and Mortality Table used. Once these variables are chosen and the projected monthly benefit is known, valuation software is used to crunch the numbers and calculate the present value at retirement and the cut-off date.
What the reader must understand is the relationship between the interest rate used and the present value calculated. The higher the interest rate, the lower the valuation. It is that simple. The choice of mortality tables is also important and can produce different results. Interest rates and mortality tables are limited by best practice in the industry. If you are comparing valuations, make sure that you know what and why both variables were chosen so that you are comparing “apples to apples.”
The final step is applying the coverture fraction to the present value to determine how much is Marital Property. You are then in a position to compare pension to pension or a pension to a similar asset or assets to see if a trade is possible.
Thankfully, the steps and calculations have been made easier by software and Internet research and the assumptions and end result can be delivered in as little as three pages.
John Faggio is a CPA, CFP®, and a Certified Divorce Financial Analyst™. Faggio Financial provides comprehensive divorce financial analysis and planning services, including pension valuations. Call John today at 410-988-7333 for an initial, flat-fee consultation or a quote to provide the services that you need.