Pension Case Study and Divorce

Case Study: Jones vs. Jones

The Present Value of Mr. Jones' Defined Pension Benefit as determined by the PBGC Actuarial and Mortality Tables Method is $63,320.04. This calculation was derived from the following facts and assumptions:

Facts Given to the Pension Appraiser:

  • Date of Birth: April 2, 1940
  • Date of Marriage: April 30, 1970
  • Date of Separation: April 30,1990
  • Date of Valuation: April 30,1990
  • Date Employment Started: April 15, 1965
  • Date Benefits Stopped Accruing: April 30,1990

Facts Governed by the Pension Plan:

  • Age When Benefits Commence: 62 Years
  • Estimated Monthly Benefit as of the Date Benefits Stopped Accruing: $842.14

Assumptions and Facts Determined by the Pension Appraiser:

  • Interest Rate Assumption: 5.80% and 4.75%
  • (PBGC Rates in effect for April, 1996)
  • Mortality Tables: 1983 Group Annuity Mortality Tables
  • Reduction for Marital Coverture Fraction: 0.7987

What effect could we have on the Present Value of Mr. Jones' Pension Benefit if we changed certain assumptions or facts?

Question #1:

If Mr. Jones started receiving benefits at age 60 instead of 62, and all other facts and assumptions remained the same, including the monthly benefit of $842.14, what would be the present value of his benefit?

Answer:
$75,638.35

Analysis:

The value is higher because Mr. Jones will receive $842.14 per month for two additional years. Conversely, the value would be less if Mr. Jones retired at age 65.

Question #2:

If the Interest Rate Assumption was 5.30% and 4.75% instead of 5.80% and 4.75%, and all other facts and assumptions remained the same, what would be the present value of his benefit?

Answer:
$67,492.58

Analysis:

To accumulate the same total amount of money over a given period of time, more money would initially have to be invested at 5.30% and 4.75% than at 5.80% and 4.75%. Conversely, the value would be less if the rate were higher than 5.80% and 4.75%.

Question #3:

If the Jones' were married on March 1, 1965 instead of April 30, 1970, and all other facts and assumptions remained the same, would the present value of his plan change for Equitable Distribution purposes?

Answer:

Yes - the value would be $75,633.11

Analysis:

Only benefits attributable to the period starting with the marriage and stopping on the date of separation are considered marital property. Mr. Jones started working after the date of marriage. Therefore, 100% of the present value of the plan was earned during the marriage. This percentage is called the "Coverture Fraction."

Question #4:

If the monthly vested benefit were $1,200 instead of $842.14, and all other facts and assumptions remained the same, what would be the present value of his benefit?

Answer:

$90,227.34

Analysis:

Provided all other assumptions and facts remain constant, the present value will increase as the monthly benefit increases and visa versa.

Question #5:

If he is expected to live longer, will the present value of his benefit increase?

Answer:

Yes

Analysis:

He would be receiving his monthly benefit for a longer period of time.

Question #6:

If the Date of Valuation changed to October 1, 1996, would the present value of the benefit change?

Answer:

Yes - the value would be $65,067.59.

Analysis:

The value is higher because he has a shorter time left until benefits start.

Question #7:

If the monthly benefit increases to $900, and the interest rate increases to 6.00%, what would happen to the present value of the benefit?

Answer:

$65,979.75

Analysis:

The increase in the monthly benefit is counter balanced by the increase in the interest rate , and will tend to produce the same present value.

Monthly Benefit      Interest Rate           Present Value
    Increases           Decreases               Increases
    Decreases           Increases               Decreases
    Decreases           Decreases               Counter Balance

Question #8:

If Mr. Jones starts receiving benefits at age 58 instead of 62, and his monthly benefit is reduced in half to $600.00, what would happen to the present value of the benefit?

Answer:

$63,888.20

Analysis:

Generally, a decrease in both retirement age and the monthly benefit will also tend to counter balance each other; thus producing the same present value.

Monthly Benefit      Interest Rate            Present Value
   Increases           Increases               Counter Balance
   Increases           Decreases               Increases
   Decreases           Increases               Decreases



Suggested Reading
Pension Issues in Divorce Pension Issues in Divorce
When couples get divorced they must decide how to divide their property. Retirement benefits (pensions) often form a substantial part of the parties' total marital estate and many times are the largest single marital asset afforded the couple. Similar to other assets, pensions are typically divisible in cases of divorce to the extent that they are acquired during the period of marriage.

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HOUSE OR PENSION -- Many women quickly grasp the idea of dividing the marital house, but the importance of the division of the pension may not seem present since its distribution may be several years away. The custodial mother of teenagers may grab at the marital home as a solution to a short-term problem but forget that down the road her share of her former husband's pension will be more important than owning a house.

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