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Pensions & Divorce: Common Asked Questions:
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:
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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
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AGE WHEN BENEFITS COMMENCE: 62 Years
ESTIMATED MONTHLY BENEFIT AS
OF THE DATE BENEFITS STOPPED ACCRUING: $842.14
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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
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
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