Tips, Tricks and Traps: Valuing Benefits Under Colorado's Pera Plan
| Jurisdiction | Colorado,United States |
| Citation | Vol. 22 No. 3 Pg. 527 |
| Pages | 527 |
| Publication year | 1993 |
1993, March, Pg. 527. Tips, Tricks and Traps: Valuing Benefits Under Colorado's PERA Plan
Attorney malpractice in family law tends to centralize around areas where "high stakes" are involved. One of those areas is retirement and pension valuation because the money involved is often substantial. Failure to appreciate the significance and dollar value of a pension or retirement may lead to malpractice claims.(fn1) In the 1987 case of In re Marriage of Grubb,(fn2) the Colorado Supreme Court made a dramatic decision overruling the case of In re Marriage of Ellis(fn3) and determined that pension and retirement plans earned during the marriage were subject to division as property. In doing so, the court fell in line with the majority of jurisdictions holding that retirement benefits were marital property subject to equitable division.
Starting with Grubb, the argument that the marital interest in a pension or retirement plan is speculative and that enjoyment is contingent on the happening of certain events no longer carries the day. To the extent that the benefits are attributable to employment during the marriage, the nonemployee spouse is entitled to share in them equitably. This article is intended to acquaint Colorado practitioners with the dynamics of dividing pension and retirement benefits under a program that covers many employees: Colorado's Public Employers Retirement Association ("PERA").
Colorado, as with most other states, has a retirement plan which covers state goverment employees, as well as employees of all school districts in the state (except Denver), the judicial system and numerous municipalities, special districts, public health departments and other local government entities.(fn4) The PERA retirement pension is an employer-contribution, fixed-benefit plan that pays a lifetime annuity on the employee's retirement. The plan establishes a benefit formula for computing the amount of future retirement installments to be payable commencing on a future date. Such benefits are based on years of service and some measure of the employee's average monthly or yearly compensation. The benefits are subject to division as marital property in dissolution of marriage cases.
In In re Marriage of Wells,(fn5) the Colorado Court of Appeals determined that the court was required to consider all of the PERA retirement benefits, not just the cash value paid in by the employee. In other words, when considering the value of the PERA retirement, the court also is required to consider the benefits paid by the employer.(fn6)
Determining the net present value of PERA retirement benefits currently being received is relatively simple. Any good spread sheet, computer program or pension valuation expert can supply the needed calculation. However, where the employee is still in service, valuing PERA benefits involves the determination of the present value of the pension. The present value of such a pension is determined by applying a series of actuarial and investment assumptions relating to the employee's life expectancy and probable retirement age to the contractual or statutorily awarded benefit.
These actuarial and investment assumptions are as follows:
1) estimation of the life expectancy of the PERA employee, based on Colorado mortality tables at CRS § 13-25-103, on the date of the decree;
2) application of a discount rate over time;
3) calculation of a base retirement annual increase of 3 percent each year after the first year;
4) calculation of a base retirement cost of living allowance ("COLA") increase of 2 percent every other year;
5) assumption that PERA retirement annual increases and COLAs do not compound base retired pay, but are added to the last year's retired pay;(fn7) and
6) assumption that the retiree will receive full retirement benefits, based on the highest annual salary for three years prior to the decree (figures supplied by PERA).
The periodic retirement benefit entitlement accrued during the marriage becomes part of an income flow commencing at retirement and continuing until death. The marital portion of the income flow is then discounted to a present value by use of a discount rate.
When determining the net present value of a PERA retirement, PERA's retirement
Once it is determined that a pension or retirement is subject to division at the time of divorce, the marital share must be calculated. This is done by computing the fractional part of the total pension...
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