A separation or divorce often involves a significant change in the economic future of your client. Often the parties to a divorce are participants in pension plans that provide retirement benefits either in a lump-sum form upon retirement or a monthly benefit. What is needed is a brief explanation of the valuation process with a focus on the practical interpretation of how certain factors assumed in a valuation model affect the final present value of the retirement plan. Pension plans fall under the broad classification of either Defined Benefit or Defined Contribution plans.
Many individuals are participants in each type of plan or one that is a combination of both.
The basic theme of this writing is to provide the attorney with not only the basic tools for valuing a participant's interest in a pension, but also provide the attorney with an understanding of the process and ability to critique the work of others. Defined Contribution Plans will not be the main focus here since the value is easily determined by the account value. The other type of pension plan, the Defined Benefit Plan, promises to pay a specified monthly benefit to the participant at a certain age for a specified period of time. It is this type of plan which will be the main focus of discussion. The calculation of the lump-sum present value itself is rather simple, however, with regard to a pension it is a two stage process.