A “traditional” present value measures the lump sum necessary to purchase an annuity which would replace the current accrued pension at the normal retirement age – the age at which benefits are not reduced or subsidized. It is basically a snapshot frozen in time and answers the common question: What is the value of this pension today?

For example, a response to a discovery letter to a pension plan usually offers an accrued monthly benefit based on present service at a “normal retirement age” – typically age 65. The traditional present value simply plugs this monthly benefit into a program to determine the value of the age 65 benefit.

Please note that this traditional present value does not reflect imminent or even distant increases in the value of a pension. As authors of six books, over 70 articles and preparers of 48,000 present values, Pension Evaluators recognizes this problem and warns you when the pension has early retirement options and potential subsidies and supplements. For example, when you order a traditional present value for a United Auto Worker with 28 years of credited service, we warn you that the lump sum value will leap from $56,000 to $345,000 in just another two years. Other present value services or software programs simply offer you a single number. A dangerous number. Dangerous because a number that is offered without an understanding of its context in the plan may understate a potential present value by a factor of six to eight times.

Of course, when you recognize that a pension offers options to retire with subsidized benefits before the normal retirement age it may be in your interests to directly order a Horizon Pension Report.