Understanding Present Values


Dividing marital property typically begins with an inventory listing all assets and their values. Determining the fair market value of the pensions poses a critical and sometimes confusing step in the process. Many states consider it a reversible error not to place a value on the pension benefit.   

Please note that present values are not required for the preparation of a Qualified Domestic Relations Order (QDRO) or any other form of a legally required document designed for the division of retirement benefits unless the pension asset is being considered against other marital assets (including Social Security). Present values are highly recommended if offsets are being considered so that the current worth of the asset is known.  


Professional legal advice is essential in sorting out a domestic relations property settlement. This brief review of some of the salient points surrounding present value reports does not replace that personal advice and only serves as a starting point for such in-depth discussion.

Reasons for the Non-Participant to Accept a Present Value

Assessing a present value for a pension and then receiving a lump sum in offsetting assets or a series of periodic payments offers at least three possible advantages to the non-participant in the pension plan. First, the parties disentangle their economic affairs bringing a finality to this component of their relationship. Second, if the non-participant spouse elects to share the pension at a future date and the participant dies prior to benefit commencement, the non-participant may receive nothing at all from the pension. Third, if the non-participant dies, either before or after pension commencement, nothing may accrue to their estate.   

Relatively few traditional defined benefit pension plans allow a lump sum distribution and far fewer allow survivorship benefits on the alternate payee's portion of a pension or the pre-retirement survivorship annuity. By choosing a lump sum distribution, from the plan (if allowed) or as an offset for an asset that they control, an individual can protect their ownership portion of a pension for their designated dependents or beneficiaries. However, once taken, there will be no future benefits due from the plan. An individual may fare better by investing their lump sum into their own retirement account. However, even if invested for the future, there are no guarantees of a better return or even that the original principal will be preserved.

Reasons for the Non-Participant to Reject a Present Value in Favor of a Deferred Distribution

Present value reports are snapshots frozen in time. The value of a pension, as measured by a present value report, may change dramatically in a short period of time. Fluctuations in interest rates are the best known cause for these changes. As interest rates increase, the present value of the pension drops; conversely, as interest rates decrease, present values increase. 

Less well known is the impact of plan design on present values. High final n-year average salary based benefit formulas usually cause the benefit to increase faster in later years of employment. Even more dramatic is the effect of retirement age. Some plans allow earlier retirement at a highly subsidized, or even unreduced, level after certain age and service qualifications are met. Some plans may pay these benefits for life or as a temporary supplemental benefit to younger but long service employees. Once a participant becomes eligible to choose a younger retirement age where benefits are not actuarially adjusted, the present value of the benefit can increase substantially. Ex-spouses are considered to have a right to share in subsidized enhancements in most courts across the country.


Date of Marriage - or date furnished by attorney to establish the opening date for determining the marital portion of the benefit. 

Date of Divorce or Last Date for Acquisition of Marital Assets - date chosen to establish the end of the marital portion of the benefit. If no date is requested by the attorney, we will use the current date. However, because this is a legal determination, we will use any date to which an attorney wishes to argue. Note: Because this is a pure mathematical calculation, we will prepare the marital value using another date, if requested by opposing counsel. 

Date of Valuation
- date for establishing ages and interest rate assumptions for actuarial present value calculation.   

Work Start Date
- date participant began to accrue benefits. 

Last Date of Employment
- date participant left employment, ceased participation or date the current accrued benefit was calculated. 

Age at Retirement - age the benefit valued is assumed to commence; usually the age the unreduced benefit may be received based on current service. (see also " VALUING PENSION PLANS -Retirement Age") 

Marital Portion (Coverture) - fraction defining the part of the benefit that was earned during the marriage (period of coverture). The numerator is the time, contributions, hours, etc. earned during the marriage while the denominator is the total service, contributions, hours, etc. earned under the plan. 

- PBGC estimate of administrative expenses that would be charged by an insurance carrier to write an annuity to pay an equivalent replacement benefit. 

Amount Available for Equitable Distribution
- this is the full value of the benefit earned during the marriage. The amount payable to each side, of course, is one-half of this amount.


Types of Pension Plans

Defined Contribution Plans

Defined contribution plans are in many forms and have many names such as: 401(k),Employee Savings, Profit Sharing, ESOP, and more. These plans are set up and administered as separate accounts for each participant, often with the participant having a large degree of discretion over their own account. Plans of this type are often voluntary and may be opted into and out of at various times. These plans may be totally employee contributions, totally employer contributions or a combination of both. The balance of the account at any point in time is its value. 

The value of a defined contribution plan is straightforward for situations that do not involve any separate property issues. However, for cases involving non-marital assets, the situation is more complex. Time based coverture, even knowing the date of first contribution, may skew the split between marital and separate property because earlier contribution deferrals tend to be less than later ones and participation may be disjointed. Subtraction does not fairly apportion investment experience. We recommend a method referred to as "passive growth." This method mathematically segregates separate property, before and/or after the marriage, and assigns proportionate gains and losses as experienced by the entire fund.

Defined Benefit Plans

Defined Benefit plans are those where the participant's benefit is defined by a plan formula that provides for a monthly benefit payable for the life of the participant. Corporate (non-government) defined benefit plans usually have a single trust fund with the plan sponsor as the sole contributor. Multi-employer plans are simply a variation where the individual employer contributes to the union plan based on the service of a participant while working for that employer. Benefits are determined at any specific point in time by a prescribed benefit formula. No individual accounts are maintained, only records of employment, salary histories and other information necessary to calculate the defined benefit.

Account or Cash Balance Plans -- Hybrid Plans

Cash balance plans now have the official designation under the Pension Protection Act of 2006 (PPA2006) as “hybrid plans.” While they are technically classified as defined benefit plans, they accumulate interest and pay credits in much the same manner as defined contribution plans. Many cash balance plans have been converted from more traditional defined benefit plans and have minimum and/or grandfathered benefits. Other plans have been established following the freeze of a prior plan and provide all benefits earned after the adoption of the plan. Final IRS regulations for hybrid plans have not yet been issued. However, different interest assumptions for the plan (one forward and one back) are no longer allowed and potential whipsaw problems have been eliminated, on a prospective basis under rulings for other defined benefit plans. 

These plans are set up as one pooled account, controlled by the plan sponsor. Records are maintained and presented to participants similar to defined contribution plans, appearing to be individual "accounts". These plans operate in much the same manner as what is known as career average defined benefit plans, as they are based on a percentage of salary earned each year. Some plans have differing accrual percentages based on age and/or service or other classification. A prescribed interest rate (usually based on a published rate recalculated at a prescribed time) is applied to existing balances usually on an annual basis. At retirement, and often at termination, a lump sum, in the amount of the Account Balance, would be payable. Account Balances can be converted by a defined formula to a monthly benefit.   

Account statements now given to participants under cash balance plans reflect a real dollar amount that they can count on. While the monthly benefit conversion calculated under the plan may decrease if actuarial conversion assumptions are changed, the account balance does not.   

There is little clarity at the current time on how to divide cash balance plans in a divorce. Because the monthly accrued pension may change, it appears that two alternatives, tracing and coverture, provide a better approach to determine how much of a plan was earned during the marriage than the traditional calculation of the actuarial value of the converted pension benefit. Currently, and until courts offer more guidance, Pension Evaluators prefers these two alternatives. To elaborate on these alternatives: The first method is a tracing of the marital and separate amounts based on the periodic interest and pay credits, using a conversion from a previous traditional defined benefit plan for the Opening Balance apportioned according to a coverture formula. The second method is to use coverture for the entire account balance, not just the conversion amount.

Which Benefit To Value?

The amount of the benefit is the greatest question relating to the plan itself. Plans that offer differing levels of benefit based on increasing eligibility requirements, grandfathered minimum benefits, or alternate formulae pose special problems. There are two major approaches to determining the appropriate benefit level, the Matured Full Vested Method and the Accrued Benefit Method, also known as the Deferred Vested Method

The Matured Full Vested Method assumes future employment and estimates a projected benefit that would be payable after a full career under the plan in question. This method must make assumptions about future employment. Even with allowance for possible termination prior to retirement, this method is, somewhat to highly, speculative in nature.    

The Accrued Benefit Method, or Deferred Vested Method, looks only at the benefit earned up to a specific date that would be payable at normal retirement age, even if the participant terminated participation in the plan (assuming he is vested). Pension Evaluators uses the accrued benefit method as our default assumption.

Retirement Age

Coincident with the benefit under any scenario is the age at which it will commence. Some plans offer early retirement benefits that are subsidized by the plan, i.e., the early retirement benefit is more generous than actuarial equivalence (less than 6% per year). Pension Evaluators will value the Highest and Best Value available through the plan (if known) under the Accrued Benefit Method. The retirement age will match the benefit valued. In other words, if the participant would be eligible for a subsidized early retirement benefit at age 55, based on current service earned, the retirement age would be 55 and the benefit would be the amount payable at 55 as calculated under the early retirement formula of the plan. Because the benefit would be paid at a higher rate for a longer period of time, this would represent the greatest value of the plan.

Unvested Benefits

Many courts have also addressed the question of unvested pensions. Our procedure applies a "vesting probability ratio" to the benefit. This is done by multiplying the benefit (based on past service only) by the ratio of service currently earned divided by service necessary for full vesting.

Marital Portion / Coverture

While courts agree that "marital property" includes the retirement benefits acquired "...during the marriage," its exact meaning is not clear. Prevailing case law across the country now employs a technique commonly known as the "coverture method."

Coverture Method

Pension Evaluators uses the Coverture Method when valuing defined benefit plans. The marital portion of the benefit is determined through application of the coverture fraction. This coverture fraction determines the portion of the benefit attributable to the time of the marriage. Usually, coverture is based on time: years in the plan while married divided by total years in the plan at termination or retirement. However, in some cases the style of the benefit accrual or the nature of the employment may dictate a modification of this method. Notable examples include Military Reserve Points, multi-employer plans where contributions are based on hours, and formulas which are based on compounded career contributions. This method assumes that the ultimate benefit is earned in roughly equal building blocks over the participant's career. 

Pension Evaluators' default position is to base the coverture fraction on the unit most closely tied to the final benefit and the intent of the formula. Benefit enhancements over time, higher salary levels later in a career and similar, end-weighted formulas should not disadvantage one party over the other based on the timing of the benefit determination(s).

Subtraction Method

Another, often argued method is known as the Subtraction Method. Under this method, the marital portion is determined by subtracting the benefit on the date of marriage from the benefit on the date of divorce. In most cases, this diminishes the value of service earned early in the career. When the method is applied to a defined contribution plan, it freezes the account balance on the date of marriage and ignores all investment gains or losses on the pre-marital portion.


GATT Method

This method was established as a result of the Retirement Protection Act of 1994 as part of the General Agreement on Tariffs and Trade. Initially established to measure the value of a lump sum payout (for plans allowing them), this method was based on 30-yearTreasury Bill rates and the GAM 83 mortality table applied on a blended, unisex basis. Many evaluators soon expanded the procedure to include the valuation of current and deferred annuities. In February, 2002, the US government dropped the 30-year Treasury Bills, leaving employers unsure of how to calculate lumpsum options and evaluators setting their own estimated interest rates. When confronted with the void, the US Treasury now calculates a hypothetical 30-year rate. In 2004 many evaluators adopted the GAR-94mortality table to more accurately reflect current mortality conditions. 

This method has fallen from use as a valuation method with the release of regulations under the Pension Protection Act of 2006. It is now used primarily as the basis for calculating lump sum distributions in defined benefit plans that use GATT as the basis for lump sums.

PPA Method

Referred to as PPA, this method is a result of the Pension Protection Act of 2006. Regulations for revision of the method for determining minimum funding standards specify the use of the RP2000 mortality table and a 3-tier or step rated interest structure. While mandated for certain liability calculations under ERISA and PBGC, this method has been adopted by only a  few evaluators for calculating present values for settlement in divorce cases.

Life Expectancy Method

This method may also be referred to as the Actuarial Method. This name is confusing because there is only one aspect of actuarial probability involved in the determination of the value. This method is often employed by accountants or financial planners as a method to estimate the current value of a particular future stream of income. Simplistically, there are four steps to this method. First, the size of the periodic payments must be determined. Next, an estimate of the number of payments the participant would receive must be made by subtracting the retirement age from the participant's life expectancy. Then, the lump sum necessary to fund that fixed number of payments is calculated. Lastly, this lump sum is discounted it to the present day.   

One major flaw in this system is that it assumes that the individual will definitely receive each of the payments and does not account for the probability that the individual may not survive to their retirement age or may live to be a centenarian.

PBGC Method

The Employee Retirement Income Security Act (ERISA) was passed by Congress in 1974 and has been amended by law and regulations several times since then. The Pension Benefit Guaranty Corporation(PBGC) was established under ERISA and within the Department of Labor to monitor funding of ongoing plans and to administer and guarantee benefits for plans terminated in distress. 

For the latter, PBGC assesses a terminating plan's liability. To do so, the PBGC estimates the cost of funding those annuity benefits by determining a value that is in line with private sector annuity prices. PBGC publishes the mortality tables and monthly interest rate assumptions they use to establish this cost based on the participant's age, sex, health and accrued benefit. "The Interim Regulation on Valuation of Plan Benefits" explains that the PBGC sets its interest rate by examining a survey of insurance company annuity prices. Those prices serve as benchmarks from which the PBGC works backwards so its interest rates and mortality factors combine to replicate the cost of single premium nonparticipating group annuity contracts.(41 FR at 48485) The interest rates, in and of themselves, are not intended to match any current investment vehicle. 

In November, 1993 the PBGC adopted three significant changes to bring its system into conformity with annuity writing insurance companies. (58 FR 5128). First, they adopted the GAM-83 mortality tables rated forward 1 year for males and back 5 years for females to create gender specific tables. Second, they instituted an expense load assumption separate from interest rates. Third, the PBGC changed the way they structured their interest rates to better reflect the timing of the future payments. In November, 1994 PBGC further amended their procedures by adopting the GATT method (30-year Treasury Bills) for valuing lump sum distributions.   

Effective January 1, 2006, PBGC adopted new mortality tables to be used when valuing plan liabilities. This change replaced theGAM-83 mortality tables with versions of the GAM-94 table (aka UP-94). The new tables will more accurately reflect current mortality and monthly interest rates will now be more in line with currently stated interest for other insurance and pension considerations. The new PBGC assumptions continue to mirror the cost to purchase a replacement benefit in the available annuity market. "...the PBGC selects its mortality assumptions with the goal of achieving consistency with the mortality assumptions used by private-sector insurers for pricing group annuity contracts....PBGC's general valuation approach is to apply a common set ofassumptions...to all plans with the goal of producing reasonable results on average."[1]

[1]    Federal Register/Vol. 70, No. 48/Monday March 14, 2005/Proposed Rules

WHAT IS.........


The roots of QDRO Group, the nation’s most experienced firm focused on dividing retirement assets in divorce, go back over three decades. Its status as the nation’s thought leader in the field stems from over 105,000 QDROs, 60,000 present values, 1,700 courtroom testimonies and eight leading legal/actuarial texts including Dividing Pensions in Divorce: Negotiating and Drafting Safe Settlements with QDROs and Present Values, Third Edition and Value of Pensions in Divorce, Fifth Edition both Wolters Kluwer Law &Business publications updated yearly. 

QDRO Group got its start in 1985, coincidentally the year that the Retirement Equity Act (REA) which created QDROs went into effect, when David Kelley started preparing present values under the name Pension Evaluators. At that time actuarial lump sum values for pensions were in their infancy, and the legal system was not quite ready to accept actuarial present values in divorce settlements or order the division of retirement benefits with QDROs. 

In 1996 Mr. Kelley was joined by ERISA attorney, Gary Shulman, author of the Qualified Domestic Relations Order Handbook, in a partnership called Kelley Shulman & Co., LLC which eventually became QDRO Consultants Co., LLC. The company added a new line of business, offering administrative review of QDROs for plan administrators. As that portion of the company grew, it created conflicts of interest that prevented the drafting of QDROs for corporate clients. It was these conflicts that sparked the spin-off of our attorney services into a separate company known as QDRO Group. This change became effective January 1, 2018 and has enabled us to continue to offer complete valuation and division services to domestic relations attorneys. Today, we still use the name Pension Evaluators on our present value reports as a reminder of our extensive experience over three decades in the industry. We certainly look a lot different than when things started in 1985, but our commitment to help you best represent your clients with safe retirement divisions has never changed.


Pension Evaluators attempts to provide unbiased, objective present value reports based on consistent, well-tested actuarial assumptions and methods. The proof of its objectivity is the vast majority of reports prepared by Pension Evaluators are stipulated to by the parties involved. It is also commonplace for Pension Evaluators to be called to court as an expert witness for both sides.    

Pension Evaluators does not argue points of law. Instead, it prepares present value reports based on the generally accepted PBGC methodology. It is important to remember that present values are dependent on the assumptions used. Attorneys may request specific dates or other items based on the circumstances of a given case which may impact the final values. However, our reports will clearly state what assumptions were used. Pension Evaluators will only testify how the numbers were calculated, not to the correctness of the unique assumption.

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