QDRO's

"Hell is truth seen too late," said Rabbi Bernard Raskas. To a lawyer, it is "case law" and an "issue" understood too late. These questions cover the biggest money issue in most divorces: the pension. All too often, couples spend the same amount of time dividing the dishes and microwave as they do dividing the pension. But then again, dishes are real, but pensions have been obscured in the arcane language of actuaries and benefit lawyers.

The issue of equitable distribution of retirement benefits effectively covers two distinct areas: present values and qualified domestic relations orders (QDROs). Typically, a present value is attached to a participant's pension. This "snapshot" view allows the court to inventory the pension along with other assets in today's dollar amounts. Next, the attorney must deal with dividing the pension. If the distribution is made by utilizing immediate offsetting assets, participants can keep their pension benefits free and clear of any further claim of their ex-spouses. Alternatively, a QDRO may be prepared that will provide nonparticipants with a deferred annuity that represents their share of the marital pot.

2. What Is a Present Value?

In the financial and insurance community, present value means a restatement in "current dollars" of a future payment or series of payments to a current lump sum equivalent. Clearly, a dollar in hand today is worth more than a dollar yet to be received. Because money compounds in value over time based on the rate of return (the "time value of money"), a present value calculation considers a future compounded sum of money and then works in reverse by effectively "uncompounding" it. This backward compounding, known as discounting, is always an element of calculating the present value of future dollars.

There is an inverse relationship of interest rates to present values: the higher the rate of interest a sum of money can earn, the less money is necessary to grow into a certain sum in the future. Conversely, as the interest rate drops, more money is necessary to grow to a specific amount in a stated period of time. Consequently, discounting by a lower rate of interest results in a higher present value than discounting by a higher rate of interest.

3. What Is the Present Value of a Pension?

When the future payments promised under a defined benefit pension plan are expressed in a single sum of money, it represents present value. To arrive at that present value, future payments must be reduced by two factors: a discounted interest rate and a mortality factor. The interest rate reduction must be combined with a mortality rate to take into account the probability of death.

4. How Do Pension Plans Differ in Structure?

A defined benefit plan typically expresses the participant's accrued benefit as a monthly payment for life; it starts at a specified age and all trust monies are kept in one large pool. A defined contribution plan resembles a savings account, maintaining individual account balances into which a specified sum of money is contributed each year. Defined contribution plan participants shoulder the risk by choosing their investments. With a defined benefit plan, the participant receives a guaranteed stream of income.

5. Isn't the Pension a Contingency Rather than a
Marital Asset?

Many courts have examined this question and concluded that a pension constitutes deferred wages. A contingency is something that may never come to pass; it is a promise or an expectation, not actual property. For example, the parties may anticipate a future inheritance, but there is no certainty that it will in fact be received. The funding and the rights to a pension accrue throughout the employee's entire working career, notwithstanding his or her vesting status at any given time. As a co-owner of the pension, the nonparticipant has a right to this real and growing asset. Although the terms of a plan may contain language describing contingent-qualifying events, such as early retirement and vesting, this should not lead one to conclude that a participant's pension is mere speculation. It is for this reason that courts throughout the country treat a pension as a marital asset. Because it was earned through the joint efforts of both spouses, it is an asset subject to equitable distribution. Pensions, of course, are funded on an ongoing basis by the plan administrator to furnish future benefits.

6. Is Health Care a Marital Asset?

Post-retirement health care coverage and death benefits are also quantifiable as lump-sum values. Because of the new accounting standards passed by the Financial Accounting Standards Board, in which health care is viewed as deferred compensation, health care benefits have entered the equitable distribution arena. The Board suggests that the future cost of providing these benefits should be reflected on the company's current balance sheet. Death benefits typically provided in pure term life insurance are subject to analysis but have yet to be treated by courts as having a lump-sum value unless there is a cash value attached to the policy.

7. How Is the Risk of Mortality Factored into a Present Value?

Some evaluators mistakenly believe that mortality is factored into a present value by calculating the fixed number of years that the pension will be paid based on the participant's life expectancy. Use of a fixed, immutable life expectancy has several serious flaws. For one thing, it assumes that a plan participant will live to his retirement age and then survive to his life expectancy. To accurately factor in mortality risks, however, every pension payment must be reduced to reflect the probability that the participant will actually live to receive that payment. For example, if a male plan participant is currently 50 years old, the probability factor that he will live to collect his first payment at age 65 is approximately 88.96 percent. Thus, the present value for that first payment should be reduced by 104 percent to reflect mortality concerns. When the mortality reduction for each payment is coupled with an interest discounting factor and all payments are summed, the result is the present value. Incidentally, the most accurate method of mortality reduction factors in the entire mortality table. Rather than using a fixed life expectancy, true actuarial statistics factor in the probability that the participant could still be receiving the pension at age 101 as well the probability that the participant may not receive even the first check. Although the chances that a plan participant will actually receive the pension at age 101 are slim (actually less than 1 percent), this probability should still be incorporated into the calculation. The mortality reduction for the payment at age 101 is over 99 percent.

8. What Does the Present Value of a Pension Measure?

That depends on your perspective. There are countless systems that use various interest rates and mortality tables. Some present value calculations simply measure the cost of funding an exact series of future payments by employing a fixed life expectancy and one established interest rate.

9. Isn't the Present Value Calculation Merely Speculative?

Without knowing the exact date of death for a plan participant, one cannot calculate with precision the current lump-sum value of all their pension payments. Thus, it is impossible to know the exact value for a specific individual. However, one can establish with excellent accuracy the fair market value of a pension as measured by its replacement costs. Depending on one's definition of the pension's present value, the exercise may or may not be merely speculative.

10. Does the Present Value Equal the Replacement Cost?

Most courts have adopted the replacement viewpoint, theorizing that the most reasonable measure of value for a series of payments is the cost of a single premium annuity that would duplicate the plan's benefits. Because an annuity is the only financial vehicle that exactly duplicates the pension's self-liquidation of principal and interest, it is the clear favorite of domestic relations courts.

11. What Are the Consequences of Defining the Present Value as the Cost of a Replacement Annuity?

Clearly, if the present value of a pension equals the cost of a comparable annuity, the pension evaluator must either obtain exact marketplace quotes for that replacement annuity or employ the same methodology used by insurance actuaries in pricing annuities. The court may choose any present value that hovers in that range of possible values, from sickly insurers to those with robust financial health, but it typically leans toward those with higher safety ratings. Weaker insurance companies that have invested in troubled real estate and bonds offer higher interest rates and lower costs for their annuities than insurers that have eschewed those shaky investments.

12. What Is the Most Popular Method for Determining the Present Value of Pensions in Domestic Relations Litigation?

The PBGC Method ranks as the dominant methodology for determining present values. It allows evaluators to approximate annuity costs closely because it utilizes the mortality tables and interest rates employed by the Pension Benefit Guaranty Corporation (PBGC) to reflect that marketplace. As part of its initial charge from Congress under the Employee Retirement Income Security Act of 1974 (ERISA), the PBGC established objective formulas to oversee the financial health of defined benefit pension plans by establishing exact funding and reporting requirements. The PBGC Method was updated in November 1993. The interest rates it employs are based on a quarterly interest rate survey of annuity-writing insurers and are fine-tuned each month. In addition, the new PBGC Method uses an updated mortality table, the GAM-83, which reflects current actuarial practice in the insurance industry.

Because the new PBGC Method tracks the annuity marketplace and is the funding yardstick for plans, it stands out as the most reasonable and objective system for the present value of pensions in domestic relations case.

13. Should the GATT Method rather than the PBGC Method be employed?

Once again, keep in mind what the evaluator is attempting to measure. The GATT Method is a method of determining the lump sum payable under a defined benefit plan if the plan offers that option. It does not measure the cost of a replacement annuity, nor does it reflect the funding the plan must have in place. It is merely a simple way of determining the lump sum payable by a plan. For younger plan participants, the GATT Method undervalues their pension in the annuity marketplace. For an older participant, it more closely follows the annuity marketplace. If a plan does not offer a lump-sum payment in lieu of the stream of payments and that election is not imminent, it makes little sense to use this market-insensitive system. The GATT Method is useful if the present value of the pension calculated under the system is less that the de minimis value of $3500 and the participant is about to be cashed out of the plan. One of the reasons the new PBGC system was not adopted by the IRS is that it was too cumbersome and complicated to put into easy-to-use tables.

14. How Does the Choice of Mortality Tables Affect Present Values?

Not surprisingly, shorter life expectancies result in lower present values. To assess the cost of an annuity or the funding of a pension accurately, the plan actuaries must first analyze over what time period those payments are likely to be made. If an evaluator chooses to use a mortality table such as the UP84 table instead of the GAM-83 table, plan participants would be assumed, on average, to live significantly shorter lives. Using the UP-84 table and keeping the interest rate(s) constant would result in lower present values. The GAM-83 table reflects more recent trends toward greater longevity by U.S. workers. Once again, consider that actuaries do not employ fixed life expectancies in calculating present values. Instead, they calculate the amount of each pension payment over all possible life expectancies and sum those values, which reflects the possibility that the person could die tomorrow or live far beyond the fixed life expectancy.

15. What Effect Do Interest Rates Have on Present Values?

The choice of interest rates has a dramatic impact on present values. For example, increasing the interest rate from 5 to 7 percent for a 40-year old male who will retire at 65 would drop the present value of his pension some 45 percent. There is an inverse relationship between interest rates and present values: the higher the discount rate, the lower the present value. That only makes sense, considering that with a higher rate of return, a lower sum of money would be necessary to grow into a certain future amount. Conversely, as the interest rate drops, more money is necessary to grow to a specific amount in a stated period of time. Of course, discounting by a smaller rate of interest results in a higher present value or original lump sum than discounting by a higher rate of interest.

16. Why Should Layered Interest Rates Be Used?

Because pension evaluators attempt to mirror the insurance cost for a replacement annuity, their formulas must reflect the real interest rates in the financial marketplace. According to the yield curve, bonds with different maturities earn varying rates of interest. A market-sensitive methodology must be able to reflect those changing interest rates. At times the rates may be grouped fairly closely. At other times there may be a wide variation in short-, intermediate-, and long-term bonds yields. Clearly, many estimators avoid using layered rates, not so much from a conviction that their rate is more suitable, but because of the pragmatic need to simplify their calculations.

17. What Interest Rates Should Be Used for Present Value Calculations?

Suggested sources for interest rates range from the minimum guaranteed passbook savings rate to long-term Treasury bonds. However, the most popular rates are those promulgated by the Pension Benefit Guaranty Corporation which are based on a survey of annuity-writing insurance companies. More recently, the Retirement Protection Act called for using the interest rate on 30- year Treasury constant maturities in determining the lump sum payable to terminating plan participants who elect to forgo the annuity.

18. What Other Variables Dramatically Affect Present Values?

Huge changes in present values may result from employing different assumptions regarding continued employment, the age at retirement, and the inclusion or exclusion of a cost-of-living adjustment.

19. How Does the Assumption of Continued Employment Influence the Present Value?

Assuming continued employment can be a significant factor in increasing a present value, both with plans that depend on high average salaries and those that grow with contractual enhancements or "ratchet-up" points. The pension evaluation approach that assumes continued employment is known variously as the "matured full benefit method"6 or the "matured full-vested approach." The method that assumes an immediate termination of employment is known as the "deferred vested approach"7 or the "accrued unmatured"8 benefit method.

Consider the present value of the pension for a teacher with 15 years of experience and a current highest three-year average salary of $40,000. (Disregard the fact that the 37-year-old teacher could push forward his or her retirement to age 52 rather than 65 by working another 15 years to reach the "30-years-and-out" threshold. If the teacher's salary increases 3 percent a year, the highest three-year average salary will reach $62,319 at retirement. Assuming those salary increases and ignoring the earlier retirement age will at least double the present value.

Some accrued pensions ratchet up sharply at specific intervals. For example, after 27 years in the plan, the nonparticipant spouse of a Central States, Southeast, and Southwest Areas Pension Fund participant would have had a present value based on her husband's accrued pension of $1400 per month. After crossing the 30-year threshold three years later, the participant's pension became $2500 per month.

Examined as a QDRO question, the difference is also dramatic. For a QDRO based on the frozen benefit after 27 years, the nonparticipant spouse would have received $700 a month over the participant's lifetime. Using a QDRO with coverture, the nonparticipant would have had a 59 percent increase in benefits to $1115 per month over the participant's lifetime.

Determining which method to employ for present values and QDROs has been a major issue in many cases.

20. How Does Accelerating the Retirement Age Increase Present Values?

Retiring at a younger age means that one's money will be received sooner and over a longer period of time, thus increasing the present value of the pension. Keep in mind that the present value is based on multiplying the accrued pension by an annuity factor that increases as one draws closer to retirement. The annuity factor for someone who is 48 and retiring at 65 may be 3.1; the same person who retires at 50 might have the accrued pension multiplied by an annuity factor of 7.7. The 246 percent increase in present value that results from an assumed earlier retirement age obviously makes this a hotly debated topic.

Consider the following example: Official estimates for some United Auto Worker pensions for workers with 28 years of service have indicated that, starting at age 65, the participants can retire with a monthly pension in the range of $1,316 for life. However, employees who continue working another two years are eligible for an immediate, unreduced retirement pension of some $1,410 a month and a $1,395 supplement until they reach age 62 and qualify for Social Security. If the evaluator assumes that a 48-year-old worker with 28 years of experience will work two more years and then retire, the present value of the entire pension, including the supplement, could increase sixfold compared to a pension that assumes an immediate termination of work and an age 65 retirement, even excluding the two future years as nonmarital by employing a coverture fraction.

Many pensions list a normal retirement age and several other ages for retirement with unreduced benefits, depending on the age and experience of the participant.

21. What Are the Arguments for Assuming Future Employment versus Assuming an Immediate Termination?

Most arguments against including salary increases after the dissolution of the marriage rest on the fact that increases are earned after the marriage and are thus nonmarital. Barth Goldberg counters that the freezing of the participant's salary at the time of divorce is "ridiculous," explaining that many pay increases are perfunctory and the result of negotiations or seniority. Keep in mind that the funding for those salary increases near retirement is in place long before retirement. In fact, the funding for those salary increases and larger accrued benefits has been in place from the beginning of employment and therefore has been earned by the joint efforts of the parties. The fact that the actual realized accrual of the pension catches up with the funding only near retirement should not be used to deny nonparticipant spouses of their rightful share of the pension on the specious grounds that the salary increase is nonmarital. Also keep in mind that the participant's highest final average salary is typically multiplied by the number of years of credit times a percentage. Therefore, say mature full-vested proponents, each year's salary increase recasts both marital and nonmarital years as more valuable, allowing participants to finally realize the funding set aside for their pensions.

The accrued unmatured backers insist that continued employment may not necessarily take place. They argue that courts should deal in what is, rather than what might be. Certainly, the likelihood that the participant might change jobs has to be factored in, especially in a society where lifetime jobs are a rarity and temporary job assignments are the norm.

22. What Is the Value of a 30-Years-and-Out Type of Pension Plan?

As domestic relations attorneys become more familiar with present values, more and more reports are containing one pension value based on an immediate termination and another value based on continued employment until the earliest retirement age. At that point it is up to the attorneys or the court to determine which scenario is more likely to happen. Considering the significant liability exposure for the attorneys involved, even those who do not calculate the value for the pension based on future employment should certainly mention the existence of that option to fulfill their professional responsibility for full disclosure.

23. What Is the Impact of Cost-of-Living Adjustments on Present Values?

Applying a cost-of-living adjustment (COLA) typical of federal and state government plans represents a valuable growth component that increases the value some 20 percent to 40 percent. For example, an Army officer retiring in 1965 at 42 years of age with a $20,000 annual pension would have an annual pension of $64,868 today based on average annual increases of 4 percent.

Keep in mind that COLA comes in several flavors. The most popular are compounding and noncompounding. With the compounding COLA used in civil service and Social Security, the percentage increase is applied to the previous year's benefit. Noncompounding COLAs, which are more typical in state plans, always base the increase on the initial entitlement. The younger the retiree, the greater the effect of COLA on the present value.

24. What Are the Pros and Cons of Including Cost-of-Living Adjustments in Present Value Reports?

Those who argue against COLA point out that a present value based on COLA may leave their clients with a bad taste in their mouths because the triggering event, such as a 3 percent increase in the consumer price index, may not come to pass each year. They add that the burden of providing COLA will force many plans to cut back. Furthermore, because COLA increases occur in the future, they are clearly nonmarital in nature. Even more savvy opponents point out that because COLA annuities are not common in the annuity marketplace, there is no common methodology even to calculate them. Why compound their wildly speculative nature with the uncertainty of its calculation?

Advocates of COLA counter that, considering the endemic nature of inflation in our society, choosing a 0 percent COLA factor is far more speculative than using a modest estimate of future COLAs. How equitable is a pension division that overlooks the likelihood that the value will double in the next 20 years? Arguing that the increases occur in the future is reminiscent of the specious attempts to declare pensions a contingency rather than a marital asset. The issue rests on one basic question: Was the COLA earned [and funded] during the marriage through the joint efforts of the couple?

Because pension plans that offer COLAs are typically governmental entities with the power to tax, concern about their future viability is unfounded. Although the woes of government budgets may be a factor to consider in limiting the size of the projected COLAs, they should in no way be used to negate the existence of COLAs.

Finally, COLA proponents agree that although calculating the cost of COLA does require some actuarial training, it is done every day in the insurance industry in order to set up structured settlements based on various growth indices. The fact that it is a more complex calculation actually lends credence to the fact that the non-COLA debate has frequently been fueled by less sophisticated evaluators who ignore the ERISA-required funding for covered plans that offer COLA.

25. What Questions Must Attorneys Answer Before Stipulating to a Present Value?

Basically, attorneys must determine the highest and lowest present values that can be obtained by using standard methodology and considering the effect of continued employment on the size of the accrued pension, and the retirement age, both of which have a dramatic effect on present values.

26. What Are the Dangers of Accepting Accumulated Contributions (Employee and/or Employer or Otherwise) As the Present Value of a
Defined Benefit Plan?

It is important to understand that most defined benefit pension plans today are noncontributory, which means that the plans are funded solely by the employer. A participant's accrued benefits are based entirely on a plan formula that typically incorporates a participant's final average earnings and years of service under the plan. There are, however, some defined benefit plans that are partially employee-funded through periodic contributions. Although participants always remain 100 percent vested in their own employee contributions, their ultimate benefit under the plan does not correlate with such accumulated employee contributions. Many attorneys labor under the misconception that this cash-out of the account balance of accumulated employee contributions represents the present value of the pension. Instead, it should be the actuarial present value of the accrued benefit under the plan. Generally, employee contributions represent only a small fraction of the value of any accrued benefit under the plan at any point during their working careers.

As a result of this faulty logic, many nonparticipant spouses have been severely shortchanged in supposedly equitable distributions. The actuarial funding methods in place for a defined benefit plan bear little relation to the employee contributions. In fact, in many plans, employees can elect to receive their accumulated contributions at retirement and still receive a sizable monthly benefit. In many state pension plans, participants receive the value of their accumulated contributions within two years of retirement. The attorney representing the nonparticipant spouse should inquire, of course, how the funding for several decades of pension benefits is derived.

27. Has the PBGC Methodology Been Utilized?

FILLER

28. Should the "Cash-Out" Value of a Defined Benefit Pension Be Accepted As the Present Value when the Participant Actually Withdraws the Funds
Before Retirement and Loses the Accrued Pension?

No. Before accepting the cash-out value of a defined benefit pension, it is critical to study the facts and circumstances of the withdrawal as well as the repurchase provisions of the plan. It is sometimes possible for crafty plan participants to successfully circumvent an equitable distribution of property by withdrawing their plan contributions and thus extinguishing-for a period of time-their right to a future pension. The lump sum received in some cash-outs may represent a refund of only the employee contributions. The employer contributions as well as interest earnings on both sums will frequently remain with the plan. In essence, only 10 to 20 percent of the actual value of the plan will be received in the lump sum.

After the divorce, the participant may, upon a short period of reemployment, recoup the 80 to 90 percent of the assets, which have been successfully put beyond the court's reach, by repaying the refunded contributions with interest. At this point, however, the plan participant no longer suffers the encumbrance of sharing the pension with someone else.

29. How Do a Plan's Early Retirement Provisions Impact on a Present Value?

Sometimes attorneys are so caught up in the esoteric aspects of the present value process that they miss important details that can have a dramatic effect on the pension's value. For example, the effect of retirement age on present values is frequently overlooked. Too often a letter comes back from a plan with an accrued pension and a normal retirement age listed. Many plans, however, contain early retirement provisions that allow (and encourage) participants to retire before their normal retirement age with their full, "unreduced" accrued benefit. The key is to determine the date at which a participant can commence his benefits on an unreduced basis. Because these dates may vary in age from plan to plan, the resulting present value differences can be staggering. These early retirement provisions often are not mentioned in letters of response from the plan administrator.

30. What Methods of Dividing a Pension Are Available in a Domestic Relations Case?

There are four methods for dividing a pension:
      1. Immediate offset with nonpension assets
      2. Periodic payments equaling present value with interest
      3. Deferred distribution via qualified domestic relations order or "cousins"
      4. Pension liquidation.

31. How Might the Nonparticipant Spouse Benefit from Choosing Offsetting Assets?

The following may be reasons for the nonparticipant spouse to agree to offsetting assets:
      1. It helps parties disentangle their affairs
      2. The nonparticipant may build an estate
      3. Investing the lump sum may beat the value secured with a QDRO
      4. It protects the nonparticipant from losing the pension if the participant dies
      (under non-ERISA plans).

Keep in mind that few defined benefit pension plans allow alternate payees (nonparticipants) to choose a survivor on their portion of the pension. Upon their death, the value of the pension drops to zero. However, by converting the defined benefit plan, in essence, to a defined contribution plan by accepting offsetting assets, the nonemployee creates a possible estate.

Whether a lump sum can surpass the value of a QDRO is a complex assessment that ultimately rests on the size of the offset and the performance of the chosen investment. Nonparticipants may reap greater gain by investing the offsetting assets rather than waiting for their share of the pension via a QDRO. This is more likely to happen when the offsetting assets are based on an aggressively calculated present value, which may include using the earliest possible retirement age based on continued employment, assuming an increase in salary, and employing a cost of living adjustment to the present value. Remember that because defined benefit plans assume the investment risk, they must base their projected benefits on conservative growth assumptions.

32. What Are the Disadvantages to the Nonparticipant Spouse of Accepting Offsetting Assets?

Nonparticipant spouses may reject offsetting assets for the following reasons:
      1. They may end up with no pension or survivorship rights
      2. They may end up with less money than a coverture-based QDRO would generate
      3. They may lose the opportunity to "double-dip" the pension in some jurisdictions.

In some states, the nonparticipant may receive half the pension in offsetting assets, and later receive part of the pension amount when it is in payout status. This double-dipping, or double- counting, of the pension could happen when there is a long-term spousal support obligation.

33. When Should the Nonparticipant RejectOffsetting Assets?

The nonparticipant spouse of a young employee who appears likely to stay with the company will probably do better by choosing a QDRO based on coverture rather than offsetting assets. This holds especially true when the plan offers an accelerated retirement age if the participant continues working, such as a "30-years-and-out" type of plan. See the UAW case study in 20 for a more detailed analysis of this question.

34. How Does the Plan Participant Benefit from Using a QDRO or Its Cousin in Dividing a Pension?

Plan participants may agree to use a QDRO for the following reasons:
      1. The participant may have greater employment incentive by keeping
      entire pension
      2. The pension cannot be double-dipped
      3. The participant does not become cash poor by giving up offsetting assets.

35. What Are the Disadvantages to the Plan Participant of Using a QDRO in Dividing a Pension?

Plan participants may reject using a QDRO for the following reasons:
      1. They can possibly forfeit survivorship rights for a subsequent spouse
      2. They can lose a portion of their benefits if their ex-spouse dies first
      3. It will allow nonparticipants to share in the growth of the pension.

36. How Does Assuming Continued Employment Influence the Nonparticipant's Decision Regarding Offsetting Assets?

Although most states declare that marital property includes the retirement benefits acquired "during the marriage," its exact meaning is not clear. The literal interpretation that the court cannot look into the future is at odds with many well-known cases. Nationally, this is a highly litigated issue with substantial case law in support of both viewpoints.

The following example helps clarify the different perspectives of the accrued unmatured benefit method (aka deferred vested method) and the

matured full-vested method. If a 50-year-old Ohio policeman has 24 years and 11 months of service at the time of his divorce, what is the value of his pension? Consider that the participant's accrued benefit ratchets up once he earns 25 years of service. Should the evaluator assume that the employee will earn another month of credit, and multiply his average high three-year salary by 59.83 percent (the first 20 years are multiplied by 2.5 percent and the next 4.917 years by 2.0 percent)? Or should the pension used for the present value be multiplied by 37.376 percent (when an officer retires with less than 25 years, the high three-year salary is multiplied by only 5 percent for each year)? Using the matured full-vested method increases the present value is 60 percent over that obtained with the accrued unmatured benefit method.

The basic logic of the matured full-vested method is that most enhancements and increases in pensions are not based on merit but rather on longevity and collective bargaining. Teachers, for example, have negotiated step increases based on their years of service, which periodic collective bargaining agreements enhance. Although salaries earned after the divorce are nonmarital, they are actually based on the earlier marital salaries. It is logical that the nonemployee spouse should at least share in part of the future growth in the pension based on the marital years. The nonmarital portion of the pension can easily be excluded through use of the coverture fraction.

For pensions that are about to ratchet up to new levels of benefits, depriving the nonemployee spouse seems clearly unfair. The real question, however, is, How far into the future should we look? Advocates of the matured full-vested approach sometimes assume postdivorce employment for 20 to 25 years in making their present value calculations. (Some systems add a further speculative aspect by figuring in salary increases, but most assume a constant salary level that ignores likely salary increases.)

Attorneys who represent the nonparticipant and cannot persuade opposing counsel or the court to agree on utilizing the matured full-vested approach to offsetting assets may be advised to pursue a QDRO that provides a coverture percentage of the final pension under the plan. This approach will provide the alternate payee with inflationary protection by using the participant's actual pension benefits at the date of his retirement. It solves the speculation involved in attempting to use offsetting assets rather than a QDRO.

37. How Does Social Security Impact the Pension Arena?

Attorneys must understand Social Security, what benefits are available, and how they are determined. For example, a nonworking spouse married for 10 years to a Social Security-covered participant is eligible for an independent benefit equal to 50 percent of the worker's benefit.

Social Security also enters the marital equation when dividing ERISA exempt pensions such as the Civil Service Retirement System or a state's governmental plans. An employee covered under a typical, ERISA-governed, employer-sponsored pension plan also is covered under Social Security and will receive both benefits upon retirement. This does not hold true for participants covered under many federal or state-sponsored retirement programs. For example, participants covered under the Civil Service Retirement System will not receive any Social Security benefit as a result of their employment. Generally, their only retirement income source will be the governmental retirement plan.

A possible problem of fairness arises when one spouse is covered under Social Security during their working career and the other employed spouse is covered under a non-Social Security governmental plan. The entire state or federal government pension plan is thrown into the marital pot to be divided, but the other spouse avoids having the Social Security pension valued as a marital asset.

The fairness issue arises because the Social Security-covered spouse will enjoy all of the Social Security benefits in addition to the marital share of the other spouse's governmental pension benefit. This is not so for the spouse covered by the governmental plan. The government employee will lose the spousal Social Security benefit because for every three dollars received from a government pension, the government employee will lose two dollars of the spousal Social Security benefit.

38. Why Should the Participant's Accrued Benefit Be Checked for Accuracy?

If the wrong accrued pension benefit is used in the present value report either with the actuarial method or the PBGC method, the resulting present value will be erroneous. As a general rule, a letter of discovery should be sent to the plan administrator to determine the accrued pension rather than relying on the evaluator. Many times evaluators and attorneys are unaware of plan formula components, such as grandfather clauses, for certain participants. Also, unbeknownst to the evaluator, the employee may have incurred one or more breaks-in-service during his working career, which will have a direct impact on the calculation of his accrued benefit.

The most frequent mistake in estimating accrued pensions occurs with many state plans when two benefit formulas are used: a salary-related formula, and a money purchase formula that credits contributions with statutory interest to provide a benefit.

39. What Are the Dangers of the Subtraction Method?

There is a critical issue surrounding which methodology to utilize when calculating the marital share of a participant's pension benefits that accrue under a defined benefit plan. The subtraction method (also known as the present value difference method) occurs when the present value of the pension at the time of the marriage is subtracted from the present value at the time of divorce. At first glance, the logic of the subtraction method is compelling. After careful review, however, the fatal flaws become apparent. Using the subtraction method is not only terribly misleading, but it also contradicts the fundamental design and actuarial funding principles of defined benefit pension plans.

Only an H.G. Wells enthusiast cares what the pension was at the time of the marriage. That pension no longer exists. Each succeeding year is like a crossing of the Rubicon: there is no going back as the participant's pension grows closer and closer to the funding that has been established for it. The fact that a participant's accrued benefit under a plan 10 years earlier on the date of the marriage was $200 per month, for example, has no current meaning, just as the present value of the accrued benefit, as calculated on that date, would have no meaning today.

During each plan year following the marriage, the accrued benefit (incorporating all of the previous years of service with the company) is totally recast, and any prior calculation becomes null and void.

The country's leading experts in the field of present values and QDROs may refer to their recommended method of dividing pensions under a defined benefit plan by different names-the coverture approach, the marital portion approach, the fixed percentage method, the proportionate share approach-but they are all based on identical methodology. These methods effectively base the alternate payee's share of the benefits on the marital portion of the participant's accrued benefit, calculated as of his date of retirement. The marital portion is determined by multiplying the participant's accrued benefit by a fraction, the numerator of which is the number of months of the participant's service under the plan while married to the alternate payee, and the denominator of which is the participant's total number of months of service under the plan as of the cessation of benefit accrual, which is typically the date of retirement.

40. What Is the Danger of Double-Dipping?

Ignoring the dangers of double-dipping marital assets stands out as a clear and present danger to the financial well-being of clients paying permanent spousal support. Double-dipping occurs when an asset is counted twice in a divorce once in the property division and again in setting alimony.

The economic consequences of double-dipping a pension are especially dramatic when compared with a "real asset," such as rental property. As a tangible asset, rental property has an intrinsic value. The rents derived from the property do not reduce the value of the property. In all likelihood, the asset will appreciate over time.

A pension is significantly different. When in payout status, a pension's value is depleted over time. The actuarial present value of a pension drops with each payment. A pension annuity, by definition, is a dissipating asset representing a total liquidation of principal and interest and disappears with the last payment.

41. What Three Areas Must a Pension Evaluator Master?

Pension evaluators must be familiar with:
      1. The mathematics of calculating present values
      2. The specifics of the pension being analyzed
      3. The law and how it relates to the evaluation.

42. Who Are the Most Credible Pension Evaluators?

After one has adopted the appropriate methodology for calculating present values, knowledge of the specific plan and the law become paramount in importance. The best evaluators often come from the employee benefits field, such as actuaries and certified employee benefits specialists. They understand the complexities associated with ERISA-governed pension plans, including their funding standards.

43. What Is the Most Successful Way to Impeach an Expert?

Uncovering weaknesses in any of the three areas can provide ammunition for impeaching expert witnesses on pensions, but the most successful approach is to demonstrate that the method and assumptions employed are atypical within the field or, even stronger, atypical for the expert. When experts are portrayed as hired guns, their word becomes suspect. Few courts go out on a limb by adopting values obtained from untested, unpublished, inexperienced evaluators.

44. Why Are the Best Pension Evaluation Experts Useless in Presenting Advocacy Reports Using Atypical Assumptions?

Even if one can convince experts to use atypical assumptions in their reports to achieve the desired result, several obstacles remain before the court will accept those reports. First, there is a substantial paper trail of contradictory reports. When the inconsistencies are disclosed in court, experts are far more likely to admit that an evil attorney forced them to utilize atypical assumptions. They will insist that they cannot tell attorneys who retain their services what the law is or should be. When pressed, however, they will admit that they would not otherwise have adopted those assumptions and that the assumptions run contrary to their typical reports.

45. What Does It Take to Impeach Expert Witnesses?

Thorough preparation is the common denominator when attorneys impeach expert witnesses. From the perspective of one who has been an expert witness hundreds of times on the present value of pensions, one ingredient, not surprisingly, stands out as a characteristic of winning attorneys-hard work. Being intelligent makes the job easier, but it does not replace diligence. Thorough preparation does not begin just before the trial, however. It means developing a comprehensive plan of action from the start that will facilitate presenting the strongest possible case for your client.

An attorney's diligence, demeanor, and attention to detail from the outset have a great deal to do with the other side's willingness to negotiate favorable terms. Veterans of the domestic relations arena can recount the less-than-attractive agreements reached by "Settling Sams." Clients need to understand the importance, and cost, of preparing the case.

46. What Advantages Do Attorneys Have over Most Pension Experts?

Attorneys have a much broader view of the case than expert witnesses, including knowledge of the facts, judicial attitudes, and other individuals involved. This 360-degree view is in marked contrast to the limited perspective of experts. In a sense, experts wear blinders. They know a great deal about one tree in the forest, but attorneys have studied the entire forest.

Look for the opposing expert's blind spots. Present value experts should know three areas: the actuarial mathematics to compute present values; the pension plan being examined; and the law as it relates to those present values. However, few experts have a comprehensive knowledge of more than one of those areas. A deficiency in any of those areas can end up blind-siding even the best of expert witnesses.

The following example should illustrate how an expert's vision might be limited. A pension evaluator might assume that a 49-year-old General Motors United Auto Worker participant with 29-plus years of credited service will retire in less than a year, because he will receive an unreduced pension as well as retirement subsidies. His monthly income will be over $2000 dollars a month until age 62, when Social Security kicks in.

Just about anyone can qualify as an expert witness, which is not nearly as facetious as it sounds. An expert is an explainer who helps the trier of fact understand the evidence or establish a fact in the case. Someone may qualify as an expert by reason of knowledge, skill, experience, training, or education. Because the definition of an expert is so broad, it is unusual to prevent someone from qualifying as an expert.

47. What Is the Difference Between Consulting and Trial Experts?

A consulting expert helps the attorney prepare the case and does not appear at trial. All of the materials and communications with the attorney are beyond discovery. However, if your consulting expert becomes your trial expert, the other side is entitled to discover those materials as needed for its case.

When hiring a consulting expert it is best to consider the possibility that the expert will become the trial expert. It could be quite embarrassing to disclose that your first letter to the expert blatantly asked for help in preparing an advocacy report. Be careful with these requests.

The best expert is not always the most expensive expert. Pension services make their money doing present value reports, not testifying in court. In fact, most larger companies consider the testimony of their witnesses a form of prospecting that each report has helped defray. Extremely skilled witnesses on present values can be hired for $75 to $150 an hour.

48. What Are an Attorney's Three Areas of Malpractice Exposure?

Attorneys must first determine the retirement entitlements of both parties. Next, they must have the pension benefits competently valued while asserting their client's right to that property in a professional manner. The last area, and sometimes the most difficult, is to secure that property right with either offsetting assets or a properly drafted order for a deferred distribution.

49. What Four Areas Should the Separation Agreement Cover to Protect the Alternate Payee's Benefits Against Actions by the Participant?

Family law practitioners should never underestimate the savvy of a plan participant when it comes to circumventing the marital entitlements of the nonparticipant spouse. Attorneys must protect their clients from this conceived threat to their property. Whether representing the former spouse under a military plan, a state or federal plan, or an ERISA-governed pension plan, the separation agreement should include language protecting the client from actions or inactions taken by the participant to the client's detriment.

The separation agreement should cover at least the following four issues:

1. It should prevent the participant from taking any actions that may limit, reduce, or extinguish the alternate payee's right to a portion of the pension benefits.

2. If the participant takes any action to the detriment of the alternate payee, the separation agreement should require that the participant make payments directly to the alternate payee to the extent necessary to neutralize the effects of his or her actions.

3. It should reserve jurisdiction for the court to enter new orders if necessary to enforce the award of the benefits to the alternate payee or to recharacterize the award of the pension benefits as alimony or as benefits under another retirement system, if applicable.

4. If the participant merges his or her pension benefits with benefits under another retirement system, the separation agreement should include language whereby the alternate payee is also entitled to his or her specified portion if the pension becomes payable under the other retirement system.

Family law attorneys must include language in their separation agreements to protect their clients from these unforeseen circumstances. Although it is acceptable to include this "anticircumvention" language in the QDRO or other court order to divide benefits, the primary place to include it is the divorce decree and/or the separation agreement. When the QDRO comes into play, it may be too late. The participant may have already taken some actions to circumvent the intended provisions of the QDRO that may not yet be drafted.

50. What Areas Should the Separation Agreement Address to Prevent Shortchanging the Nonparticipant's QDRO Rights?

All too often, the separation agreement contains one sentence regarding the division of retirement benefits, for example, "Wife shall receive one-half of Husband's pension benefits; QDRO shall issue." Although this may expedite the divorce case, when it comes time to draft the QDRO, it could be a nightmare for both sides as the nonparticipant attempts to include cost of living adjustments, survivorship coverage, early retirement subsidies, and so on in the QDRO.

When attorneys are representing nonparticipants in a divorce proceeding and the participants are covered under an ERISA-governed defined benefit pension plan, the separation agreement should contain the following language at a minimum:

Determination of Alternate Payee's Share of the Pension Benefit. The separation agreement should specify exactly how the alternate payee's share of the benefit is to be determined. In other words, should the coverture approach or some other approach be utilized to calculate the alternate payee's share of the pension?

Remember, under a defined benefit pension plan, neither a participant nor an alternate payee is entitled to any interest or investment earnings under the plan. The only way to provide an alternate payee with some inflationary protection is to utilize the marital portion, or coverture, approach.

Survivorship Coverage. Include language that will provide the alternate payee with qualified preretirement survivorship annuity (QPSA) coverage if the participant predeceases her prior to their benefit commencement date. The only way to help secure the alternate payee's ownership right to a portion of the participant's pension benefits is to provide such death benefit protection. Otherwise, the right to an equitable share of the benefits is forever lost when the participant predeceases her before retirement.

(Postretirement) Cost-of-Living Adjustments. The separation agreement may include language that provides the alternate payee with a pro rata share of any postretirement cost-of-living increases that are attributable to the marital portion of the participant's benefits. If the attorney intends to do so for the QDRO, it should also appear in the separation agreement.

Early Retirement Subsidies. The separation agreement should also state that the alternate payee is entitled to a pro rata share of any employer-provided early retirement subsidies granted to the participant on the date of retirement

51. What If the Participant Dies Before the QDRO Is Drafted?

If you do not draft the QDRO coincident with the separation agreement, nonparticipants run the risk of forfeiting all their pension rights if the participant dies before the QDRO is approved by the plan administrator. A properly drafted QDRO will incorporate survivorship rights for the alternate payee, assuring a lifetime of benefits. The alternate payee should be considered a coowner of the participant's pension benefits, not merely one who stands in the shoes of a creditor. Therefore, appropriate survivorship coverage should be negotiated with opposing counsel at the time of divorce, and the QDRO drafted immediately.

Under certain conditions, a QDRO may be submitted to the plan administrator after the death of the plan participant. For example, if the plan is paying out a surviving spouse annuity to a subsequent spouse, a timely drafted QDRO might provide that all or a portion of such survivor benefits are to become payable to the former spouse.

52. Why Can Stating a Present Value Amount in the QDRO and Separation Agreement Be a Fatal Flaw?

After both parties have stipulated to the present value of the participant's pension benefits, it is agreed that a QDRO shall issue that will provide the nonparticipant with a portion of the participant's pension benefits. In preparing the applicable section of the separation agreement, do not fall into the potential malpractice trap of incorporating the stipulated present value amount into the agreement if you are going to pursue a QDRO for your client.

On the date of divorce, the present value of a participant's accrued benefit under a defined benefit pension plan is merely a "snapshot" view of such value, stated in today's dollars. The stipulated present value amount is accurate for one day only-the date used in the calculation by the pension evaluator. For example, if it is determined that the present value of John's accrued benefit was $8840 on March 1, 2002, it will be different the following day and each day thereafter, up until his date of retirement.

For this reason, the stipulated present value amount should not be included in the separation agreement, except for informational purposes. Unless there are other offsetting assets that the parties agree to utilize to equate with the present value amount, then its inclusion in the separation agreement will, in reality, have no effect and may serve only to mislead the parties, their respective counsels, and perhaps even the judge.

The inherent problems caused by including the fixed-dollar present value amount in the separation agreement is one of the reasons QDROs were initially created. A pension plan administrator must be able to determine definitively the amounts payable to an alternate payee under a court order. A stated lump-sum amount cannot be translated by the plan administrator years later when benefits are paid in the form of a monthly annuity.

53. What Is the Urgency of Drafting a QDRO when the Participant Has Already Retired?

If the plan participant is already in receipt of his pension annuity, it is imperative to execute the QDRO immediately and submit it to the plan administrator.
Even if the plan administrator is willing to review the draft order before the judge signs it, don't do it. Many plan administrators will not withhold the specified portion payable to the alternate payee until they receive an executed copy of the QDRO. Furthermore, they will not make any payments to the alternate payee on a retroactive basis. When they receive the executed QDRO, even if it is not yet deemed qualified, they must immediately segregate benefits pursuant to 414(p)(7) of the Internal Revenue Code. Once any deficiencies in the QDRO are cured (if done so in a timely manner), all segregated benefits become payable to the alternate payee in a single, lump-sum payment.

54. How Does Misunderstanding the Phrase "Actuarial Reduction" Cause Significant Problems with QDROs?

Under a defined benefit pension plan, an alternate payee can commence her share of the benefits on or after the participant's earliest retirement age even
if he does not retire at such time. However, she may be shocked to realize that her expected $500 per month (which represents one-half of the participant's accrued benefit) could be reduced by as much as 30 to 40 percent if she commences her share prior to his normal retirement age, and by another 20 to 30 percent on top of that if he does not retire when she elects to commence her benefits. Instead of getting $500 per month for life as she thought, she could receive only $200 per month after a full actuarial reduction is applied to her share of the benefit. The QDRO should include broad language that permits her to elect when she wants to commence her share of the benefits. If she has other sources of income, it may be in her best interests to defer her pension commencement date.

55. Why Should the Words "Vest," "Vested," and "Vesting" Never Be Arbitrarily Used in a QDRO?

When describing the portion of the benefits payable to an alternate payee, do not confuse the phrase "vested benefits as of the date of divorce" with the participant's accrued benefit under the plan. The alternate payee's share of the benefit should be based on the participant's accrued benefit as of a particular date, not his vested benefit, nor vested accrued benefit. Because an alternate payee can commence her share of the benefits on an unreduced basis only at the participant's normal retirement age, vesting is generally no longer an issue and only causes confusion for the plan administrator interpreting the order. The fact that the participant may have been only 60 percent vested in his accrued benefit on the date of divorce should have no bearing on the alternate payee's eventual annuity distribution. Because the alternate payee, too, must generally wait years before commencing her benefits, the vesting percentage associated with her share grows right along with the participant's ever-increasing vesting percentage.

56. Why Does Confusing a Defined Contribution Plan with a Defined Benefit Plan Cause Problems with QDROs?

In the QDRO for a defined benefit pension plan, never include language that provides the alternate payee with interest and investment income on her share of the participant's benefits. Under a defined benefit pension plan, there are no individual accounts and hence no interest nor investment earnings posted to them. The only way to provide inflationary protection for the alternate payee is to utilize the coverture approach, which bases the alternate payee's share of the benefits on the participant's accrued benefit as of his date of retirement, not the date of divorce. Of course, a coverture fraction (years of service during marriage divided by total years of service) is then applied to the participant's benefit at retirement.

57. What Terminology Should Be Used in Dividing a Defined Contribution Plan?

When drafting a QDRO for a defined contribution plan, never refer to the participant's "accrued benefits" or "retirement benefits" under the plan. Refer only to his "account" or "account balance" under the plan because under defined contribution plans all participants have individual accounts established on their behalf.

58. What Is the Most Common Oversight in Drafting a QDRO for a Defined Contribution Plan?

When drafting a QDRO for a participant covered under a defined contribution plan, such as a 401(k) plan, do not simply provide the alternate payee with 50 percent of the participant's account balance as of the date of divorce. The alternate payee should be entitled to future growth on her share of the benefits, and to a pro rata share of any contributions made to the plan after the date of divorce, if they are attributable to periods or plan years before the divorce. Many times, a plan administrator delays making any plan contributions until after the end of the plan year.

59. What Is a "Sneaky" Plan Loan?

Watch out for participants who attempt to make a loan or withdrawal just before the submission of a QDRO in order to reduce the alternate payee's 50 percent share. Language in the QDRO should provide that the alternate payee's share of the pension is to be calculated without regard to any loans made by the participant before the date of divorce.

60. How Can Attorneys for Nonparticipants Prevent an Unfair Shifting of the Tax Burden to Their Clients?

When drafting a QDRO for a stock plan, such as an ESOP, be sure to include language that directs the plan administrator to maintain an equivalent tax
basis for the alternate payee when segregating the participant's account. Absent such instructions, a plan administrator could transfer 50 percent of the participant's total number of shares in such a way that the alternate payee's eventual tax liability is significantly greater than that of the participant's.

61. Can a Defined Contribution Plan QDRO Provide Investment Growth?

Yes. When drafting a QDRO for a defined contribution plan, such as a 401(k) plan, always include language that provides the alternate payee with any interest or investment income or losses attributable to her share of the participant's account for periods subsequent to the date of division of plan assets. If you forget to include this language, the alternate payee's share of the participant's account could be deemed frozen as of the date of divorce.

62. Is It Important to Explain the Provisions of a QDRO to Your Client?

Whether drafting the QDRO from model QDRO language supplied at a seminar or from a company, or having QDROs drafted by an expert, it is essential to fully understand the provisions and implications of the QDRO in order to explain them properly to your clients. This is particularly true with respect to the issues of survivorship rights and how the actual share of the benefits will be calculated by the plan administrator. Even if you represent the participant and have nothing to do with the drafting of the QDRO, review its terms with your client prior to its implementation with the company.

If the separation agreement is vague regarding the equitable division of the participant's pension benefits, such as "wife gets one-half of husband's pension with Company ABC," the participant may be surprised many years later when he realizes that the QDRO language provided the nonparticipant with a portion of his accrued benefit at retirement (utilizing a coverture fraction), although he expected her to receive half of his frozen accrued benefit at the time of the divorce. Complications can also arise when he reams that she is receiving a portion of his annual postretirement cost-of-living adjustments. Even though the QDRO language may be deemed equitable, it does not necessarily adhere to the intent of the parties.

63. Should You Request an Interpretative Letter from the Plan Administrator Regarding Your QDRO?

Yes. Consider this: the plan administrator has just sent you a letter approving the QDRO drafted on behalf of your client. Is your job done? Perhaps not. It is quite possible that the plan administrator's interpretation of the QDRO will not match the intent of the parties, including how you thought the QDRO would be administered. If the QDRO approval letter does not include a complete description of how the administrator will interpret the provisions of the QDRO, request this information.

Quite often, a QDRO is not very specific with regard to survivorship rights for the alternate payee. There may be a single sentence in the QDRO that provides the alternate payee with preretirement or postretirement survivorship rights, but the method of calculating the survivor benefits is usually missing from the QDRO. A good plan administrator will reject a QDRO that is silent regarding the extent and or method of survivorship protection for the alternate payee. Inquire as to how the plan administrator will actually calculate any death benefits that may become payable to an alternate payee. See Chapter 2.

64. Why Are Model QDROs Dangerous?

Now that QDROs have been around for awhile, many plan administrators have developed their own model QDROs for use by family law attorneys. Although such models may expedite the QDRO approval process, review the terms of the QDRO carefully to be sure that the intent of the parties is met. Many sample QDROs effectively mandate the terms of a property settlement by being very restrictive in their methodology. Do not let a plan administrator dictate the terms of your property settlement.

For example, many model QDROs do not contain language regarding cost-of-living adjustments for the alternate payee. If you have negotiated pro rata COLA adjustments for your client, be sure to include them in the QDRO. Fortunately, many companies will let you know that their model is just that, a generic QDRO that addresses only the simplest of approaches. But by "simple," they are really referring to its ease of administration. Do not take the easy road by simply filling in the blanks; be sure that your client's rights are fully protected.

65. How Does the Client's Age Impact on QDRO Negotiations?

Dividing the participant's pension benefits remains as the final settlement issue. In this example, the participant is 65 years old and preparing to retire on a $2000-per-month pension. It has been assigned a present value of $223,690 by the pension evaluator. In representing the 70-year-old nonparticipant spouse, you and opposing counsel agree to a QDRO that provides your client with 50 percent of the participant's monthly pension benefits because there are no other significant offsetting assets.

Under a defined benefit pension plan, a participant's monthly accrued benefit typically commences on an unreduced basis at his normal retirement age, usually age 65. From a simplistic standpoint, the actuarial present value of a participant's monthly pension annuity as of his normal retirement date is the amount of money needed to fund the annuity for the remainder of his lifetime.

Remember that when it was agreed that the nonparticipant would receive 50 percent of the participant's pension benefits, she was really entitled to 50 percent of the present value of the participant's pension. When you instructed the plan administrator to provide your client with 50 percent of the participant's pension, you should also have stated in the QDRO that your client's share of the benefits was to be actuarially adjusted based on her own life expectancy.

The result is the magic of actuarial science. The two parties could receive a total of $2157 in monthly pension benefits with a well-drafted clause. First, your client is entitled to 50 percent of the present value of the participant's pension annuity, which is $223,690. Therefore, your client's share is $111,845. Now, how much of a monthly annuity can a 70-year-old purchase with $111,845? More than a 65-year-old? Certainly, when you consider her shorter life expectancy.

Because an older annuitant has a shorter life expectancy (all other things being equal), she could purchase a larger monthly annuity. With each party receiving a present value amount of $111,845, the participant could receive an actuarially equivalent monthly pension payment of $1000 (his original pension payment of $2000 per month was based on a present value of $223,690) for the remainder of his lifetime. Your client, on the other hand, could receive a monthly pension payment of $1157 for the remainder of her (anticipated shorter) lifetime. To carry this logic one step further, if the nonparticipant were 10 years older than the