A pension plan is a defined benefit retirement account. It pays the Member or Participant a set amount of money (a defined benefit) for the duration of his or her life. In some instances a spouse or a former spouse is treated as survivor and receives a payments for the rest of his/her life if the Participant or Member dies first.
Generally, the value of a life time annuity is huge. This is particularly true if the payments are high. In the case of many public pensions/annuities, the payout is very large, around 75% of the retiring employees highest income.
There are less and less private pensions out there. Most employers have switched to defined contribution plans (like 401(k) or IRA plans). The public sector still has defined benefit plans. For example, the federal government has the Federal Employees Retirement System or FERS. State, county and municipal employees often participate in plans controlled by state legislation. For example, in Illinois, there are many, including, the Teachers’ Retirement System of the State of Illinois or TRS, State Employees’ Retirement System of SERS, State Universities Retirement System or SURS, Chicago Teachers’ Pension Fund or CTPF, Firemen’s Annuity and Benefit Fund of Chicago and “Downstate” Fire Pensions, and police pension funds.
When you divorce, you have three (3) options: divide the pension, not divide the pension and buy-out. To buy-out the other party or to accept a buy-out amount, you have to determine what it is worth. Clearly, having payments for life (or life of the former spouse) is a great benefit. The question to ask is: how much money is needed to invest now, to have guaranteed annuity or income as the one from the pension?
One way to answer that question is to shop around for annuities. Find out how much money you would have to pay to guarantee that income. You will learn that the financial institutions will want to know your sex, age and probably, a bit about your health. It may be the case that a comparable annuity is simply out of reach.
Another method is to determine (or try to) likely interest rates over the coming years and ask how much you would have to invest at those rates to have the income for as long as the Member is likely to live. For that, you may wish to talk to an actuary or at least have an accountant or attorney use appropriate software that will take into account mortality tables.
To run any of the above, you will first need to know how much the pension will pay and when. You will need full disclosure from the Member to get this information. You will have to have a statement of benefits for divorce or for preparation of QILDRO. The statement will need to provide you with benefit estimates at earliest retirement age and full retirement age based on continued employment. If you are the Member or Participant, you may want to have the same estimates, but based on credits earned only until divorce.
Remember, the devil’s always in the details, and in this case, details concern one of the biggest, if not the biggest asset in your marriage.