Pensions, Defined Benefit Plans and Divorce
This type of plan promises that upon retirement the employee will receive a defined (known) monthly income for life. The yearly contributions necessary to provide the promised monthly benefit upon retirement are unknown and depend upon a number of variables, such as:
The amount of the defined monthly benefit is determined by the type of Defined Benefit Plan. Most Defined Benefit Plans fall into one of the following categories:
Fixed Benefit Plan
This type of Defined Benefit Plan establishes the monthly benefit as a definite (fixed) percentage of the employee's remuneration. The plan usually takes the average of the annual compensation for a period of years prior to retirement and multiplies it by the fixed percentage.
Example: 50% of the average yearly compensation over the 4 consecutive plan years which produced the highest annual compensation.
Flat Benefit Plan
Under this type of Defined Benefit Plan, the employee receives a monthly benefit expressed as a fixed dollar amount, such as $1,000 per month.
Unit Benefit Plan
Upon retirement, under this type of Defined Benefit Plan, the employee will receive a monthly benefit determined by a pension unit. This unit is multiplied by each year of service for which the employee receives credit. The pension unit is a percentage of compensation, such as 2% or a defined dollar amount.
How Defined Benefit Plans are Valued
In order to determine the value of a benefit under a Defined Benefit Plan as of a specific date, the appraiser actuarially determines the present value of receiving pension benefits in the future. In other words, the appraiser determines the amount which must be invested today, so that upon retirement, the plan has sufficient funds to provide the employee with the appropriate monthly benefit for life. In determining the present value, the appraiser considers mortality, age on date of valuation and separation, normal retirement age, the monthly entitlement upon retirement, an appropriate interest rate, and other variables.
Typical Scenario:The Jones' were married on April 30, 1970. Mr. Jones has been employed by the XYZ Company since April 15, 1965. On April 1, 1996, the Jones' separated. As of the date of separation, Mr. Jones had accrued a vested benefit of $842.14 per month payable at age 62. He was born on April 2, 1940. What is the present value of Mr. Jones' Defined Pension Benefit? The services of a pension appraiser are secured to determine the present value of the Defined Pension Benefit by the PBGC Actuarial and Mortality Tables Method, Life Expectancy Method , GATT Method or a Specific Method (dictated by state law).
Resources & Tools
WIFE’S DISADVANTAGE -- Women of all ages often go into divorces on a less equal footing than their husbands and, therefore, must pay particular attention to the long-term consequences of the division of the marital estate. Women may enter and leave the work force to the demands of child rearing, which lowers their contribution to their own pension plans (if they have them), and they may, for the same reason, juggle low-paying, part-time jobs that together yield a living wage but one without benefits and certainly no pension.
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PensionAppraisalDeskTM uses a mathematical, web-based calculation software that gives family law attorneys, their clients, and pro se filers an instant, easy, accurate appraisal of the present value of pension benefits for equitable distribution upon divorce.
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