Note: Always change the interest rate set in the software to reflect the current interest rate when you prepare your valuation.
GATT legislation passed in 1994 changed the methodology for valuing pensions in divorce by calling for a market interest rate (defined for some purposes as a 10+ year Treasury Note) to be used in determining lump sum values of a pension and by mandating an updating of life expectancy tables. Government funding pension requirements called for changes in interest rates from prior Pension Benefit Guaranty (PBGC) practice of using lower interest rates to value lump sum pension amounts.
Recommendation. Start with the current 10+ Year Treasury Note rate and adjust this rate depending on how actuaries in your area are valuing pensions in divorce.
The 10+ Year Treasury Note rate is available each day in the Wall Street Journal under the Interest Rate Table for US Treasury Securities. Look up the actual yield (not the stated yield) for a longer term T bond. This is usually the last line of the table. It is also printed in many other daily papers, because it is the benchmark rate for tracking government interest rates. is again issuing 30 Year Bonds and values are shown in the Wall Street Journal.
Another method to reach the fair market value of a pension is to price an annuity with a stream of payments identical to the pension benefit. Some consultants use this methodology and the interest rate is actually a yield curve (different rate for each different period as set by market).
Annuity rates are generally at, or slightly higher than 10+ Year Treasury Note interest rates depending on market conditions.
The PBGC publishes monthly interest rates used in administering different aspects of pension plans.
If you choose to use the PBGC rates for valuing a pension, the rate to be used is the PBGC rate for valuing annuity benefit payments which the PBGC states as a rate for the first 20 years following plan termination and a slightly different rate for the remaining periods. You would enter the PBCG rate for valuing annuity benefits (first 20 years) into Divorce Math Calculations.
It is recommended that you discuss these various interest rates with your actuary to determine an appropriate approach for valuing pensions in your state. The interest rate is a critical variable in valuing pensions and this section is intended to provide background for making an informed decision on this variable.
The PBGC interest rates may be found at www.pbgc.gov. More specifically, go to http://www.pbgc.gov/prac/interest/monthly.html. Look for interest rates after you have consulted with your actuary about how to use this information.
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