Valuing pension benefits in divorce: look before you leap.

To become competent pension valuators, CPAs must do much more than master the tedious actuarial calculations.

Many practitioners who read "Evaluating Pensions Benefits in Divorce" (by Ralph A. Pope, JofA, Aug.93, page 62) may have concluded that valuing pensions for divorce purposes is a reasonably straightforward process that easily can be learned and added to their repertoire of professional services. While in many areas of financial accounting there is only one acceptable way to perform a procedure, such is not the case with pension valuation. As Dr. Pope pointed out in his article, state laws govern the factors to be considered when performing such valuations, and the laws regarding pension valuation are not uniform from state to state. Further, even the acceptability and credibility of valuation methods and the types of exhibits presented to a court may differ between jurisdictions in a single state because of judges' preferences.

As is the case when mastering any complex accounting procedure, practitioners who wish to add pension valuation to their practices should proceed with caution. This article describes the basic steps such practitioners should follow before venturing into this practice area.

DETERMINE THE LAW OF THE LAND

The first step is to survey the statutes and existing case law in the applicable jurisdiction. Since most practitioners aren't legal experts, one of the best ways to do so is to ask several family practice lawyers which cases control pension valuation matters in their jurisdictions. The matters that must be addressed include but are not limited to the effects of vesting, the age at which benefits should be assumed to begin, the acceptable life expectancy table, whether a mortality discount exists, appropriate discount rates and the effects of future events on the receipt of a pension.

Vesting. Practitioners should determine whether their jurisdictions consider an unvested pension or the unvested portion of a pension to be property. Even if an unvested pension is not considered property, a valuation may be necessary for a court to consider the "economic circumstance" of a pension. If a

jurisdiction has not determined unvested pensions to be property, the attorney who has engaged a valuator may want to survey other states' laws and present a case to establish a precedent in his or her jurisdiction.

Age at which benefits should be assumed to begin. Practitioners should determine whether it is better to use an early retirement benefit or a normal unreduced pension benefit for valuation. Many reference sources suggest the earliest available date is appropriate. In one state, however, a recent case decided by the court of appeals set the age at which the normal unreduced benefit is available as the standard to be used when valuing retirement plans.

Acceptable life expectancy tables. Many jurisdictions have codified life expectancy tables that are to be used regardless of a valuator's opinion of their appropriateness. It is not unusual for a unisex table to be required, even though it may seem grossly unfair to males in comparison with other tables that consider additional factors such as race and sex.

Existence of a mortality discount. Using only the life expectancy of the annuitant and the present value of the benefits for valuation ignores the risk of premature death. Whether an additional discount should be taken to balance the risk of premature death varies from jurisdiction to jurisdiction. If a mortality discount is taken, the source of acceptable data (such as the "UP-1984" tables--the Pension Benefit Guaranty Corporation's 1984 unisex pension tables) must be considered.

Appropriate discount rates. Many sources address the appropriate discount rate to use in given situations. Such rates rarely, if ever, are a matter of law, since changes in economic conditions may lead to changes in appropriate discount rates.

Effects of future events on the receipt of a pension. Some nonqualified plans--supplemental executive retirement plans, in particular--are received only if certain events occur in the future (such as a decision by a board of directors to provide funding) that are speculative in nature. Whether such plans' benefits can be considered property may vary from state to state and even from jurisdiction to jurisdiction. Due to the speculative nature of such benefits, considerable attention must be given to selecting an appropriate discount rate.

ACCEPTABLE VALUATION METHODS

After jurisdictional laws have been reviewed, a prospective valuator's next step should be to obtain copies of pension valuations that have been accepted by the court in his or her jurisdiction to determine which valuation methods are acceptable. Analyzing past valuations can provide significant information on how pension valuation has changed over time in a given jurisdiction. Practitioners also should obtain transcripts of other valuators' presentations to the court to prepare for expected cross-examination questions. This step also may be helpful if the attorney who has engaged a valuator asks that questions be formulated for his or her cross examination.

An incomplete work paper file can be fatal to a valuation. At a minimum, practitioners should have a synopsis or copies of applicable cases with relevant sections highlighted, evidence supporting the discount rate used, a copy of the plan, the summary plan description, copies of all company-provided documents they relied on, life expectancy tables, mortality tables, correspondence and the valuation itself

It's highly likely that a pension value will be stipulated by the parties involved and no testimony by the valuator will be required. However, when testimony is required practitioners should avoid burdening a judge or jury with schedules and methodologies that are difficult to understand. The cardinal rule is to keep valuations as simple as possible and to present them at a pace that will not tax the attention or comprehension of the judge or jury. A succinct yet complete explanation of the concept of present value and how it relates to pension valuations is the key to a credible presentation.

In addition to technical knowledge and capabilities in performing pension valuations, valuators must understand and be able to present to a court options for dividing a plan in accordance with a qualified domestic relations order. This may include knowing what optional forms of benefits are available under a plan's terms as well as devising an appropriate formula for dividing the benefits of a defined-benefit pension plan. Since some government and other plans may not be divided, it may be appropriate to, suggest awarding the non-participant spouse other marital assets or to develop a compensating alimony arrangement.

Valuators also must be able to provide information about the applicability of the early distributions surtax, state exclusions of pension income and any other relevant tax-related information.

A COSTLY INVESTMENT

Valuing pensions is a dynamic practice area, and substantial advances and changes have occurred in the last decade. The investment of time and effort in learning an appropriate valuation method is minor compared with the investment required to attain an understanding of the applicable state laws, tax considerations, division considerations and how to testify.

EXECUTIVE SUMMARY

* VALUING PENSIONS FOR divorce purposes requires a mastery of pertinent state and local laws. The acceptability and credibility of valuation methods and the types of exhibits that may be presented to a court often differ between jurisdictions.

* BEFORE ADDING PENSION valuation to their mix of services, practitioners should survey the statutes and existing case law in the applicable jurisdiction to determine

1. The effects of vesting.

2. The age at which benefits should be assumed to begin.

3. The acceptable life expectancy table to use.

4. Whether a mortality discount exists.

5. The appropriate discount rates.

6. The effects of future events on the receipt of a pension.

* PRACTITIONERS SHOULD obtain copies of pension valuations that have been accepted by the courts in their jurisdictions to determine which valuation methods are acceptable. They also should obtain transcripts of other valuators' court presentations to prepare for expected cross-examination questions.

* AN INCOMPLETE WORK PAPER file can be fatal to a valuation. Practitioners should have a synopsis or copies of applicable cases with relevant sections highlighted, evidence supporting the discount rate used, a copy of the plan, the summary plan description, copies of all company-provided documents they relied on, life expectancy tables, mortality tables, correspondence and the valuation itself when they go to court.

JOHN R. CONNELL, CPA, is principal of Causey Demgen & Moore, Inc., Denver. He is a member of the American Institute of CPAs and the Colorado Society of CPAs (CSCPA). WILLIAM H. VINCENT, CPA, is manager of Causey Demgen & Moore, Inc. He is a member of the AICPA and of the CSCPA.