A pension doesn’t come with a balance on a statement the way a 401(k) does. It comes with a promise that a monthly check will be sent in the future, for an unknown number of years, built on assumptions that can move the value by tens of thousands of dollars. Change those assumptions and an otherwise fair settlement could be put in jeopardy. Here is what attorneys and financial professionals need to know to spot a solid valuation, question a shaky one, and hold their own on the stand.
First: Confirm It’s Actually a Defined Benefit Plan
Retirement plans fall into two basic categories: one is relatively straightforward to divide, while the other requires specialized analysis.
Defined contribution plans including 401(k)s, profit-sharing plans, ESOPs value themselves. The account balance on the statement is the value. Nothing to calculate.
Defined benefit plans are the ones that need more attention and analysis. Instead of an account balance, the participant gets a fixed monthly benefit at retirement based on salary and years of service. A quick way to tell them apart: plans called “Pension Plan” or “Retirement Plan” are usually defined benefit plans while plans titled “Savings Plan” or “Profit Sharing” usually mean they are defined contribution plans.
Defined benefit plans are less common and have fallen out of favor with employers because they can be expensive, unpredictable, and place long-term financial risk on the employer. They are still standard in many industries, for government employers, school systems, police and fire departments, and the military. When a client has one, it’s often the biggest asset in the marriage and the one most likely to get mishandled.
Why This Matters for the Divorce Cases and Settlement
In most jurisdictions, divorce courts require each party to fully disclose all assets and debts. This requires assigning a value to every asset subject to division, including pension plans. If both spouses agree to divide the pension payments as they are received during retirement, determining a detailed pension present value may not be necessary. This is because the pension payment stream is typically divided 50-50, so that asset’s value is removed equally from both sides of the total.
But if one spouse wants to keep the entire pension and must trade other assets to offset it, they will need a defensible present value for the settlement. That number will affect the rest of the negotiation, so it’s important to get an accurate value.
How to Calculate the Present Value of a Defined Pension Plan in Family Law Software
Valuing a pension starts well before you open Family Law Software. Professionals must first contact the plan administrator. Reaching out to them is essential as they can provide the two documents professionals rely on most: the annual plan participant statement and the Summary Plan Description (SPD). Together, these two documents will provide the estimated benefit amount at retirement, the proposed benefit start date, and when the participant first began participating in the plan.
Some plans go a step further, providing the percentage of compensation that accrues per year of service along with the formula used to calculate the ultimate retirement benefit. It’s also worth checking whether the plan includes automatic annual cost-of-living adjustments, since that can meaningfully affect the long-term value.
Once this information is available, running a quick valuation in Family Law Software is straightforward: just enter the participant’s date of birth, retirement age, benefit amount, and the date to value the plan, and the software can take care of the rest, making assumptions along the way. Users can explore all the assumptions by clicking the green “More Info” box to explore other variables and assumptions explored below.
Assumptions that Affect the Present Value
When valuing a pension, there isn’t one “correct” calculation. It is a stack of assumptions and predictions, and each one changes the result. Professionals must be aware of these important factors while valuing a pension. Attorneys may not run these calculations and variables themselves, but they should recognize each one when reviewing a report:
- Life expectancy. How long will the client collect payments? While no one knows when they are going to die, it is an important factor to determine the value. This will also shift depending on the client’s age at valuation as the same pension valued at 55 and at 65 will produce different numbers. Family Law Software does not use a single life expectancy number, but rather a more precise mortality table approach that gives the probability of living through each year, given that the person lived through the prior year.
- Discount rate. Converts future monthly payments into today’s dollars. This is the single biggest lever in the whole calculation explored in more detail below.
- Pre-retirement mortality risk. The participant might not live to reach retirement at all, so the value gets reduced by the probability of surviving that long.
- Benefit amount and retirement age. Most plans offer an early and a normal retirement age, each paying a different monthly amount. Valuing the same pension at different retirement ages produces different present values and is a common area for dispute.
- Cost-of-living adjustments (COLAs). Common in government plans, rare in private ones. A COLA raises the present value because the payments grow over time instead of staying flat.
The Discount Rate Continued
If there’s one assumption worth pushing back on in a valuation report, it’s the discount rate. Why? The lower the discount rate, the higher the value. A small change here can dramatically change the final number.
Family Law Software defaults to the current 20-year U.S. Treasury bond rate, updated monthly. It’s a safe, long-term rate that roughly matches how long someone spends in retirement, and it’s the rate courts have typically accepted.
If a valuation is built using PBGC (Pension Benefit Guaranty Corporation) rates, treat that as a warning sign. Those rates exist for insurance solvency purposes, not divorce valuations, and they run lower than Treasury rates which naturally inflates the present value. If opposing counsel’s expert used PBGC or any rate beyond a cautious investment rate of return, that’s a legitimate line of cross-examination.
Mortality Tables: Know Which One Was Used, and Why
When a defined benefit pension is on the table in a divorce, one of the most consequential technical decisions is how its present value gets calculated. The Life Expectancy Method picks one number, the participant’s chosen statistical life expectancy and pays out for exactly that many years, then stops. It treats the guesstimate death date as a certainty.
In the alternative, the Mortality Table Method discounts every possible payment year by the actual probability the participant is alive to receive it, weighing shorter and longer lifespans together. Family Law Software favors the more accurate actuarial method. Valuations apply a full mortality table rather than assuming a single fixed life expectancy. Family Law Software defaults to the RP-2014, generally the most current and accurate table available. There is no one “correct” mortality table. Each table reflects different underlying populations, and different levels of conservatism. The choice of table can meaningfully affect a valuation. Below is a rundown of the mortality tables commonly used and available in Family Law Software:
- RP-2014 — Is the default mortality table and likely the most accurate table available today. RP-2014 introduced a new method for adjusting for anticipated advances in health and medical technology, known as generational adjusting. Under this approach, the adjustment differs by calendar year so the generational adjustment applied to someone turning 65 in 2024 is different from the one applied to someone turning 65 in 2020. This year-by-year adjustment was an innovation in mortality projections. Published by the Society of Actuaries’ Retirement Plans Experience Committee, RP-2014 Mortality Tables Report (Oct. 27, 2014), https://www.soa.org/globalassets/assets/files/research/exp-study/research-2014-rp-report.pdf.
- RP-2000 — The data underlying this table comes from the lives of private-sector (non-government) employees, so it should best mimic the experience of the average worker in private pension plans. It also includes more blue-collar workers and other “less-healthy” populations, so it tends to reflect a population-wide average more accurately than some of the alternatives. Published by the Society of Actuaries’ RP-2000 Mortality Tables Report, RP-2000 Mortality Tables Report (rev. May 2001), https://www.soa.org/globalassets/assets/files/research/exp-study/rp00_mortalitytables.pdf.
- UP-94 — This table is based mostly on the lives of federal civil servants. It tends to give slightly higher results than RP-2000 and may best reflect white collar employees. As a result, values may tend to be slightly higher than the RP-2000 values. This table is generationally adjusted and gender specific. Published by the Society of Actuaries’, 1994 Uninsured Pensioner Mortality Table, XLVII Transactions of the Soc’y of Actuaries (1995), https://www.soa.org/globalassets/assets/files/communities/retirement/tsa95v4721.pdf.
- GAR-94 — The GAR-94 mortality table stands for “Group Annuity Reserving 1994.” Because it was developed for use by insurance companies in establishing reserves, it is generally considered to be somewhat conservative. In other words, valuations based on GAR-94 may be slightly higher than those produced using mortality tables such as RP-2000 or UP-94, which may provide a less conservative estimate. Published by the Society of Actuaries’ Group Annuity Valuation Task Force, 1994 Group Annuity Mortality Table and 1994 Group Annuity Reserving Table, XLVII Transactions of the Soc’y of Actuaries (1995), https://www.soa.org/globalassets/assets/files/communities/retirement/tsa95v4722.pdf.
- US Census Bureau 2020 (used in Colorado divorce cases) — This was published by the National Center for Health Statistics, using Census Bureau population estimates as an input: U.S. State Life Tables, 2020, 71 Nat’l Vital Stat. Rep., No. 2 (2022), https://www.cdc.gov/nchs/data/nvsr/nvsr71/nvsr71-01.pdf.
- GAM-83 — Commonly used in used GATT and PBGC valuation methods. This is an outdated table and should generally not be used in divorce cases. It is included because some practitioners continue to use it based on familiarity or because it has been used historically in their practice. Because the table is based on older mortality assumptions and has not been generationally adjusted, it may produce lower valuation results than more current mortality tables. For this reason, practitioners should carefully consider whether the table remains appropriate for the particular valuation and circumstances of the case. Source: 1983 Group Annuity Mortality Table, adopted by the NAIC in December 1983; mandated for pre-2000 IRS current-liability calculations under Rev. Rul. 95-28 (healthy lives) and Rev. Rul. 96-7 (disabled lives). Link: https://mort.soa.org/ViewTable.aspx?&TableIdentity=826;
- IRS Revenue Ruling 2001-62— This is a unisex mortality table based on the GAR-94 table, with mortality assumptions updated through 2002. Unlike some more current tables, it is not generationally adjusted. We include this table because it remains relevant in certain situations where federal regulations require or permit its use. If the plan were to calculate the lump sum it would pay for the pension (which is not necessarily the pension’s true actuarial value), it may use this method. Source: Rev. Rul. 2001-62, 2001-2 C.B. 632, https://www.irs.gov/pub/irs-drop/rr-01-62.pdf, modified by Rev. Rul. 2007-67, 2007-48 I.R.B. 1047;
- IRS Unisex Table for 2023 — IRS Notice 2022-22 (April 27, 2022), Appendix, column labeled “Unisex” — the §417(e)(3) applicable mortality table for stability periods beginning in 2023, derived from the §430(h)(3)(A) tables per Rev. Rul. 2007-67 methodology, https://www.irs.gov/pub/irs-drop/n-22-22.pdf;
- IRS Unisex Table for 2024 — IRS Notice 2023-73 (October 19, 2023), Appendix — the §417(e)(3) applicable mortality table for stability periods beginning in 2024. Source: IRS Notice 2023-73, 2023-45 I.R.B. 1232, https://www.irs.gov/pub/irs-drop/n-23-73.pdf.
The practical point for attorneys is to ask which table or life expectancy was used and why. A table swap alone can shift a valuation meaningfully, even with every other input unchanged.
Coverture: What’s Actually Marital
In divorce cases the present value is only part of the issue. The coverture fraction determines how much of that value counts as marital property versus the participant’s separate property.
The math is straight forward: if a client worked two years before the marriage and eight years during it, the coverture fraction is 80% (2 years during marriage / 10 years total). Apply that fraction to the pension’s total value, and that is the marital portion. The rest would be allocated as separate property in most jurisdictions.
For example, suppose a valuation showed a pension worth $100,000 as of the valuation date. With a coverture fraction of 80%, the marital amount would be $80,000. The other $20,000 would be the participant’s separate property. It is worth noting the plan’s start date and the separation date affect coverture, but they don’t change the pension’s underlying value.
A 60-Second Review Before Relying on Any Calculation
Attorneys don’t need to be actuaries to sanity-check a valuation. Here’s a rough version anyone can run in Excel.
Assume a pension pays $2,000/month starting at 65, for a 50-year-old male client, at a 2.5% discount rate with no COLA:
Annual benefit: $2,000 × 12 = $24,000;
Payout period (ballpark life expectancy of 83): 18 years;
Payments start 15 years out. In Excel:
=PV(0.025,18,24000) gives $344,480 as the value at retirement. Discount that back 15 years — =A1*(1/(1.025)^15) — and it comes to $237,852 today.
This won’t match a full valuation exactly, since it skips the mortality-table adjustment for pre-retirement death. But it should land close. If a valuation is way off from this quick math, that’s the cue to ask more questions before signing off on it.
What Family Law Software Can (and Can’t) Handle
Family Law Software values virtually every corporate, municipal, state, educational, and military defined benefit plan, and the results should line up closely with what an outside actuarial firm would produce given the same inputs. The one thing it doesn’t handle: plans with unusual features, like sudden jumps or cuts in benefits during the payout period, beyond a standard COLA. For everything else standard formulas, early or usual retirement structures, COLAs, coverture is built to give financial professionals and attorneys a defensible number without needing to hire an outside actuary for every case.
Key Takeaways
A pension valuation is only as good as its assumptions, and every assumption is something an attorney or financial professional can check, question, or challenge. Knowing what the discount rate does, which mortality table was used, and how coverture was calculated turns a valuation from a number to accept into a number to verify. Before signing off on any pension valuation, run the quick math, know where the assumptions came from, and be ready to defend or dispute every one of them.
Helpful Resources:
Family Law Software Power Webinar: Pensions: https://www.youtube.com/watch?v=r1RjidSnorQ