The initial valuation at the retirement date utilizes a present value methodology to determine the value of the monthly pension amount over the life expectancy (M, F and Unisex) determined from the UP-94 mortality tables which are typically used in divorce.
Actuaries do not value pensions this way, but instead develop factors from these mortality tables (which are different for each interest rate used) and take into account the probability that an individual may die at each age from the date of retirement well beyond life expectancy.
The actuarial approach will result in a slightly lower pension valuation at the date of retirement from the method of determining the present value of a stream of monthly benefits over the life of the individual. The valuation difference is between 0% to 6% at the retirement date depending on interest rates used and the different life expectancy in gender based and unisex tables.
Note: Divorce Math is not intended to replace an actuary, but pension estimates should be as accurate as possible.
To better reflect the actuarial valuation, an actuarial factor was determined which will adjust the traditional present value methodology to better replicate an actuarial valuation.
In developing this factor, an actuary prepared pension valuations, using:
UP-94 mortality tables - M, F and Unisex,
Retirement ages between 40 and 70,
Interest rates from 4% to 9%.
The same cases were prepared using the present value life expectancy method and a percentage relationship was developed for each of the three mortality tables at each interest rate.
This factor has been incorporated into the valuation methodology with the software interpolating for interest rates between the cases. Cases were run at 4%, 5%, 6%, 7%, 8% & 9% and interpolation is used for rates between the whole percent number.
The same actuarial factor approach was used for a case with a 2% cost of living increase. This results in an estimated pension value which is within 1% of an actuarial valuation at the age of retirement using UP-94 mortality tables.
Calculations to reflect mortality discount before the retirement date and the earlier value at the date of divorce are consistent with actuarial practices. The pension estimate prepared by Divorce Math is very consistent with an actuarial value using the UP-94 mortality table. These factors will need to be updated when the UP-94 tables are replaced with a new mortality table.
Some of the factors are show in the following tables below.
|
AGE |
4% |
6% |
|---|---|---|
|
UP-94 MORTALITY TABLE MALE |
||
|
55 |
96.49 |
96.60 |
|
65 |
95.42 |
94.65 |
|
UP-94 MORTALITY TABLE FEMALE |
||
|
55 |
97.28 |
97.73 |
|
65 |
96.16 |
95.76 |
|
UP-94 MORTALITY TABLE UNISEX |
||
|
55 |
96.78 |
97.06 |
|
65 |
95.69 |
95.09 |
There may be times when the user wants to ignore the actuarial adjustment factor (not recommended) and use a straight present value methodology in estimating a pension value. The actuarial adjustment factor is a percent and shows on line 5 of the pension report. This percent is a formula which you may override. To ignore the actuarial adjustment factor, enter a 1 (100%) on line 5 and recalculate. To restore the original actuarial adjustment formula, use the Tools menu and Default - data and recalculate.
Lines 7 and 8 of the report show a reduction to reflect mortality discount. This is used by actuaries in pension valuation to reflect the fact that an individual who is less than the retirement age may not live until retirement age and they would then get no value from the pension. In many pension plans, an individual gets nothing if they die before an age set in the plan. This may happen even though the person is vested. Some divorce attorneys do not want to show this reduction in divorce analysis. To not show this reduction, enter a 1 (100%) on line 7 and recalculate. To restore the original actuarial adjustment formula, use the Tools menu and Save New Settings then recalculate to restore original formula.
See also:
Valuing Pensions - Required Data