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Should You Order a Horizon Pension
Report?
Most
of the present values we prepare are the "traditional"
type which are based on the current frozen accrued benefit based
on the artificial assumption that the worker quits work contemporaneous
with the divorce. Be forewarned that traditional present values
can be very misleading in "30 years-and-out" and similar
pensions which subsidize early retirements. When you represent
the non-participant spouse, you should also know the value of
the pension based on continued employment to the earliest retirement
age with inflationary - and sometimes subsidized - increases
to the benefit. To actuaries this value reflects what is known
as the "most valuable accrual rate." Our Horizon Pension
Report offers two present values: the traditional present value
as well as the value of the subsidized early retirement pension
based on continued employment.
Horizon Pension Reports also analyze exactly how much the non-participant
spouse would have to earn if they invested money based on the
traditional present value and hoped to equal the value of the
projected pension. This rate, known as the Kelley-Shulman Scale,
quantifies the choice between QDRO and offsetting assets. The
$315 spent for the report is not an academic exercise because
the value of the projected pension could be accessed via a coverture
based QDRO. As the Kelley-Shulman rate climbs, so does the likelihood
that the non-participant will choose a QDRO.
Horizon Pension Reports recognize that defined benefit pension
plans are fickle, rapidly changing creatures that can bite even
the most experienced practitioners. It is common for the value
of the "most valuable" form of the pension to be three
to six times the value of the frozen benefit at the time of
the divorce. Sometimes those ratcheted-up values can occur in
just months following the divorce. But even when these threshold
events are not imminent, the second present value is essential
in choosing between offsetting assets and a QDRO.
Incidentally, if the actuaries funding the plan have taken into
account these significant increases in benefits on an ongoing
basis, shouldn't the court allow the nonparticipant spouse to
share in those maritally funded, inherent increases in the pension?
To understand how present values can change so dramatically
by assuming continued employment it is necessary to know how
"deferred vested" and "service" pensions
differ. A "deferred vested" pension is the basis of
the traditional present value. It refers to the accrued benefit
that the plan participant would receive if they terminated employment
under the plan contemporaneously with the divorce - clearly
an artificial assumption.
The "deferred vested" benefit begins at the plan's
Normal Retirement Age (NRA) - typically age 65. For example,
if you wrote to General Motors and asked for the accrued benefit
for a 52 year-old United Auto Worker participant with 27 years
of credited service, you would be told that he had an accrued
benefit of $1,330 a month payable at age 65. The traditional
present value might indicate a value of some $120,560.
Many cases settle with the
non-participant spouse receiving assets worth $60,280 ($120,560/2).
Accepting that frozen present value rather than drafting a
coverture based QDRO, however, could be extremely injurious
to your client. With three more years of credited service
the plan participant could retire directly from active employment
with a "service" pension of some $2,805 a month
lasting until age 62 at which time it would drop down to $1,298
a month upon the receipt of Social Security benefits. The
present value of the marital portion of this "service"
pension would ratchet up to more than $720,838 - a sixfold
increase. And here you see the Kelley-Shulman Scale would
reveal the traditional present value would need to grow by
43% a year in order to equal the value that one could obtain
with a properly drafted coverture QDRO. The Kelley-Shulman
Scale is calculated in each Horizon Report to offer guidance
on whether offsetting assets or a QDRO should be chosen.
Numerous pensions offer similar generous subsidized early
retirement benefits for employees retiring from active employment.
Ohio government plans such as PERS, STRS and SERS are the
most common types of these "30 years-and-out" plans.
By encouraging early retirement, the employer keeps a younger,
less expensive labor force. Those covered by the Police and
Firemen's Pension and Disability Fund may retire as early
as age 48 with full benefits if the plan participant has also
completed 25 years of credited service. In many pensions,
the subsidy is simply accelerating the NRA. Clearly, when
a participant retires before the NRA, more money is necessary
to fund the greater number of payments starting at an earlier
time. Under the Civil Service Retirement System, for example,
a participant with 30 years of service can retire from active
service at age 55. However, if the participant voluntarily
leaves before age 55, they must wait until age 62 for the
unreduced pension.
Admittedly, many courts are reluctant to accept the present
value of the pension based on the contingency of future work.
However, the value of that future benefit can be accessed
through a "properly drafted" coverture QDRO. By
"properly drafted" we are referring to a QDRO which
provides a benefit clause with service in plan while married
as the numerator and total service as the denominator times
50% times the participant's ultimate retirement pension. In
addition, the QDRO must refer to the alternate payee's right
to a prorata share of any early retirement subsidies or supplements.
WARNING: Always keep in mind that even with a coverture based
QDRO, the early retirement supplement is not payable to the
alternate payee unless the participant actually retires.
Clearly, it is important for domestic relations attorneys
and their pension evaluators to value the pension based on
threshold events such as "30 years-and-out" subsidized
benefits -and not only when they are days or months away -
before stipulating to a present value. They should also value
the potential increase to the pension based on increases to
the salary or the benefit multiplier. When writing to the
plan you should inquire about all early retirement subsidies
and supplements available for "service pensions."
The Horizon Pension Report eliminates much of the guesswork
in comparing the values of the subsidized pension versus the
traditional frozen accrued benefit at marriage value. Even
if you do not order a Horizon Report which spells out the
early retirement features and subsidies, it is always a good
idea for you to examine the Summary Plan Description (SPD)
so that you can explain the early retirement and subsidy features
of the plan to your client.
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