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PENSION VALUATION – FLORIDA RETIREMENT SYSTEMS
APPLICABLE INTEREST RATE

In the great majority of Florida Retirement System pension valuations the principal reason for the difference in the present cash value of a pension being valued incident to a dissolution action is the interest rate assumed by the pension valuator. It is our view that the interest rate to be used for the determination of the present cash value of the martial portion of an FRS employeeEs pension should be the actual interest rate used by the Florida Retirement System. To offer an alternate interest rate assumption is to open the door to needless controversy and expense resulting from arguments in support of, or opposition to alternate interest rates. When the interest rate of a Retirement System is published, frequently updated and easily accessed, there should not be objection to use of this interest rate.

Use of the Retirement SystemEs interest assumption for the calculation of the present worth of an employeeEs monthly accrued benefit produces values that reflect the SystemEs actual Funding Values rather than the diverse opinions of experts. It is least controversial to rely on the systems valuation parameters than to deviate from the actual FRS rate by imposing alternate interest rate calculations. Again, because the FRS publishes its actuarial assumptions annually, there should be no valid reason to disregard these assumptions.

The economic impact of deviation from the computational parameters of the FRS can be substantial. The adverse impact of deviation from the FRS interest rate falls upon the Florida employee. To demonstrate the magnitude of this adverse impact resulting from deviation from FRS interest assumptions, two classes of FRS employees are illustrated.

  • Regular Class
  • Special Risk Class

Alternate Interest Rates Used for Illustration.

  • PBGC Interest Rates.

A sometime used interest rate assumption for ERISA plans are the rates of the Pension Benefit Guaranty Corporation (PBGC). The PBGC rate in effect at the time this article was prepared was (4%). The historical rates of the PBGC can be found at pbgc.gov/prac/interest.html. This rate is used as an alternate rate.

• 30 Year Treasury Bond.

A Second Interest rate assumption for ERISA plans is the 30 Year Treasury Bond rate. The 30 Year Bond rate in effect at the time this article was prepared was (3.52%). This rate is used as a second alternate rate. The historical rates of the 30 Year T-Bond, can be found at finance.yahoo.com/q/hp?s=%5ETYX+Historical+Prices.

Commentary:

Do not let the array of numbers in the Appendices lead to dismay. It is suggested that Attorneys focus on the percentage of difference in present cash values caused by deviation from the interest rate assumption of the Florida Retirement System. The younger the employee the greater the disparity between the values. At virtually all ages the increase in value to the Former Spouse more than doubles when the interest rates of the FRS are not applied. However, as the valuation date age of the employee increases the disparity between values decays.

Smallest Increase over FRS present cash value: 99.91%.

Greatest Increase over FRS present cash value: 224.43%.

Increases of this magnitude merit attorney attention to the valuation assumptions used in FRS pension valuations. When an interest rate deviation from Retirement System's rates is proffered, the attorney representing the Employee Spouse will for the reasons presented in this article vigorously oppose incorporation of such rates into the valuation.

Burdened Attorney.

Clearly, the burdened attorney is the attorney representing the Employee Spouse. She or he must be vigilant and argue for the application of the interest assumption of the Florida Retirement System.

Clarification.

The intent of this article is to inform, not to advocate. It is however, Troyan's position that when the interest rate of the plan benefit valued is readily available it should be used for present value calculations. If you disagree with the position presented in this article, you are encouraged to communicate with Troyan presenting your alternate views.

REGULAR CLASS

APPENDIX A Female

Female

Female

Date of Birth

7/1/1974

7/1/1974

7/1/1974

Date of Marriage

7/1/1999

7/1/1999

7/1/1999

Date of Hire

7/1/2000

7/1/2000

7/1/2000

Date of Divorce

7/1/2014

7/1/2014

7/1/2014

Date of Divorce Age

40.00

45.00

50.00

Coverture Fraction

100.00%

100.00%

100.00%

Numerator

14

14

14

Denominator

14

14

14

NRA

60

60

60

Life Exp.

42.3

37.7

33.1

Benefit accrual rate

1.60%

1.60%

1.60%

Final Avg. Pay

$45,000.00

$45,000.00

$45,000.00

Mo. Benefit at Divorce

$840.00

$840.00

$840.00

Marital (100%)

$840.00

$840.00

$840.00

To Former Spouse (50%)

$420.00

$420.00

$420.00

FRS Interest Rate (7.75%)

IA Cost

$53,418.50

$53,771.88

$54,114.51

Disc Factor

22.47%

32.64%

47.41%

PCV

$12,004.56

$17,550.77

$25,653.16

PBGC (4%)

IA

$74,284.10

$75,103.62

$75,910.14

Disc Factor

45.64%

55.53%

67.56% 1

PCV

$33,902.29

$41,702.37

$51,282.17

% PCV Increase over FRS

182.41%

137.61%

99.91%

30 yr T-Bond (3.52%)

IA

$77,796.07

$78,708.92

$79,609.03

Disc Factor

50.06%

59.52%

70.76%

PCV

$38,946.86

$46,844.65

$56,327.40

% PCV Increase over FRS

224.43%

166.91%

119.57%

Abbreviations Used in Appendices.

NRA Normal Retirement Age

IA Immediate Annuity (annuity purchase

cost)

PCV Present Cash Value

YOS Years of Service

1 Time to AGE 60 varies due to AGE at Date of Divorce.

APPENDIX B

SPECIAL RISK CLASS

Male

Male

Male

Date of Birth

7/1/1978

7/1/1974

7/1/1970

Date of Marriage

7/1/2001

7/1/2001

7/1/2001

Date of Hire

7/1/2002

7/1/2002

7/1/2002

Date Action Commenced

7/1/2014

7/1/2014

7/1/2014

Date of Divorce Age

36.00

40.00

44.00

Coverture Fraction

100.00%

100.00%

100.00%

Numerator

12

12

12

Denominator

12

12

12

NRA (@25 YOS

49

53

57

Life Exp

42

38.3

34.6

Benefit accrual rate

3.00%

3.00%

3.00%

Final Avg. Pay

$60,000.00

$60,000.00

$60,000.00

Mo. Benefit at Divorce

$1,800.00

$1,800.00

$1,800.00

Marital (100%)

$1,800.00

$1,800.00

$1,800.00

To Former Spouse (50%)

$900.00

$900.00

$900.00

FRS Interest Rate (7.75%)

IA

$124,863.16

$119,616.20

$113,085.41

Disc Factor (constant @13 Yrs.)

37.89%

37.89%

37.89%

PCV

$47,316.18

$45,327.88

$42,853.07

PBGC (4%)

IA

$185,195.30

$171,692.05

$156,038.72

Disc Factor (constant @13 Yrs.)

60.06%

60.06%

60.06%

PCV

$111,223.50

$103,113.80

$93,712.81

% PCV Increase over FRS

135.71%

127.48%

118.68%

30 yr T-Bond (3.52%)

IA

$196,104.26

$180,727.80

$163,215.79

Disc Factor (constant @13 Yrs.)

63.78%

63.78%

63.78%

PCV

$125,075.32

$115,268.21

$104,099.05

% PCV Increase over FRS

165.06%

154.30%

142.92%