Proper valuation of pension plans
This is the first in our ten (or so) part series on mistakes made in divorce of Federal employee’s. To set a ground rule, I’m going to always refer to the employee and the non-employee. It’s up to the reader to translate these terms into the husband or wife and/or the petitioner or respondent. In a few cases, of course, both may be employees, but those situations are rare enough not to burden the reader with any more trivia … read into the thoughts as you wish, based on the position of your client in the case.
When I wrote the words “pension plans” in the headline I had in mind specifically, the CSRS (Civil Service Retirement System) and the FERS (Federal Employee’s Retirement System). I’m going to focus all my information and advice around these two major plans. They cover a majority of federal employees, but certainly not all … so step number one in any of these cases is to find out exactly what plan is being dealt with.
CSRS in its current form dates back nearly to Civil War times. It is one of the most generous plans and one of the simplest to understand and value. It is strictly a defined benefits plan … that is, the employee makes fixed contributions and is guaranteed certain benefits based on salary, age and time in service. The employee, aside from his or her job performance over a span of years, can do little or nothing to influence the value of the plan under normal circumstances, and the NPV (Net Present Value) can be calculated by straight-forward actuarial means. The plan is, however, a dying one. All employees entering service after 1986 have been placed in the FERS and some CSRS participants moved to FERS, so year by year your CSRS clients are going to dwindle.
To attempt to explain a system like this in a paragraph or two is impossible, this is just the most cursory of introductions to a larger issue. The main problem posed by the CSRS in divorce cases is a tendency to consider the employee’s cash contributions made to the plan as the value, and to fail to properly consider the proper time for distribution, actions that could result in severely reduced or no distribution, and value to the non-employee of the various means the CSRS value could be divided.
FERS in its current form came into being in 1986 as part of a congressionally mandated federal employee retirement “overhaul”. FERS is at least 3 times as complicated as is CSRS, because it has at least three components. First is a defined benefits component that in some ways mimics the CSRS. If an employee puts in enough years and attains a certain age, he or she will get an annual annuity (normally paid monthly) for life. Second, the FERS employee participates in the TSP (Thrift Savings Plan) and his or her benefits are thus directly affected by voluntary contributions made along with Federal participation. Thirdly, the biggest difference between FERS and CSRS is that FERS employees contribute to the Social Security program (CSRS employees don’t). Thus, at a minimum, for FERS employees, all three components have to be properly valued. Whenever congress “overhauls” a program, it certainly never gets simpler.
OK, this post is already long enough. To those who are already experts on these issues don’t laugh at me too loudly. As always my standard caveat applies. I am not a legal professional; always seek your actual advice from a qualified person. However, I hope my brief synopsis has alerted those who are not experts to the fact that there is a lot more to the proper valuation of Federal plans than may first meet the eye. Do yourself the favor of seeking expert guidance before important decisions are made.