“In-House Spreadsheet”
Re Present Valuation of Defined Benefit Plan
By: Gunnar J. Gitlin
The Gitlin Law Firm, P.C., Woodstock, Illinois
© 2005
www.gitlinlawfirm.com
One of the critical issues in divorce cases is determining the value of a defined benefit plan. As any lawyer knows who handles divorce cases, often a client will not agree to a valuation by a competent professional of a defined benefit plan. I have found that if a lawyer can demonstrate to his client that the plan has significant value, etc., then the client will readily agree to a prevent valuation by a professional – actuary, economist, etc.
Use of an in-house valuation can provide a lawyer quickly with a handle on the estimated value of a defined benefit plan. Additionally, a working knowledge of the approaches used by economists versus actuaries will also provide you with knowledge as to the critical assumptions used by each type of expert.
1. Pension Plan Present Value: There are two critical assumptions: the life table used and the interest rate used.
a. Current Life Table: For the most recent life table available see:
Life Tables — National Vital Statistics Reports: July 1, 2002 (Vol. 53, No. 06)
Volume 53, No. 6. This is a “pdf” file based upon the U.S. Life tables for July 2002, which is the most recently available life tables as of the time of submission of my written material.
I believe that the U.S. National Center for Health Statistics, Vital Statistics of the United States contains the most accurate life tables. Keep in mind that as tables become more up to date, life expectancies generally increase. An increase in life expectancy, will increase the present value of the defined benefit plan. The expectation of life table is subdivided into the following subgroups: Male and Female, Black and White. Using tables for white males as opposed to all males will very slightly increase the present value. There was a significant recent increase of life expectancy for black males.
b. Interest Rates: There are two sources generally for interest rates, the PBGC or the newspaper (WSJ). The PBGC rates are available at: www.pbgc.gov/practitioners/interest-rates/content/hr1008.htm
Use the table for valuing immediate or deferred annuities. I tend to use the long term T-bond yield rates. Note that as of the time of this memo, the rates are at a historical low. Remember, the inverse relationship. As rates go lower, the present value increases.
c. Spreadsheet: The use of my spreadsheet should be self-explanatory. It can be modified if there is not a premarital component.
The Gitlin Law Firm, P.C.
Practice Limited to Family Law
663 East Calhoun Street
Woodstock, IL 60098
815/338-9401
© 2005, Gitlin Law Firm, P.C.
Updated on November 28, 2005