Pensions in divorce: What are they and how are they split?

Pensions have almost become a benefit of the past, having been replaced by 401(k) plans.  However, they still exist for state and federal employees and the military.  Also, because the majority of my clients are older and have been in long term marriages, often they are grandfathered into a pension with their private employer.

What is a pension anyway?  A pension is a promise to pay a monthly benefit for the rest of an employee’s life, and if there is a survivor benefit, for the rest of the spouse’s life when the employee dies.  It is based on a formula which is commonly based on years of service, final pay and a multiplier.  Pensions are (or were) put in place by employers to encourage long term employment.

Unlike 401(k) plans (or 403(b) plans in government agencies), where there is an account balance, pensions have to be valued.   I tell my clients to think of the value of a pension in the following way:  What lump sum of money would I need to invest to guarantee that starting at retirement, there would be enough money to pay me a monthly amount of “X dollars” for the rest of my life?  To answer that question, I need to know the following:

• What is the monthly amount of the pension payment?
• When do payments begin?
• Based on the persons age now, using an actuarial table, how long is that person expected to live?
• What is the discount rate?  In more understandable terms, at what safe interest rate would the lump sum have to be invested so there would be just enough money to pay the monthly pension through the actuarially expected date of death?

If there is a survivor benefit, so that all or part of the pension will be paid to the employee’s spouse (or former spouse), the pension is usually reduced to compensate that the pension will most likely be paid over a longer period than the employee’s life.  Getting a survivor pension is of value to the surviving ex-spouse which can’t be overlooked.  In these cases, there may be two values to compute:  the pension based on the employee’s life expectancy and the pension the surviving ex-spouse might be getting.   

As a Certified Divorce Financial Analyst, I have the knowledge to value pensions for my clients and understand the many other technicalities of dividing pensions. Since pensions are often one of the most valuable marital assets, it’s important to get it right!! 

Mary Salisbury

Mary Salisbury is a Certified Divorce Financial Analyst, a divorce mediator and divorce financial planner in Wilmington, NC. She is the founder and owner of The Right Divorce Solution, LLC. Ms. Salisbury practiced as a financial advisor and narrowed her niche to divorce when she saw that her clients did… MORE