Just PENSIONS

A. General Observations

In a defined benefit pension plan based upon final salary, if employment continues and if salary increases are received, additional benefits that have value are created. This additional value is dependent upon community service and separate, post-separation salary increases. If either the community service piece or the separate, post separation salary increase piece is missing, no additional benefits are created. The development of this potential additional benefit is contingent upon the continuation of service and the receipt of salary increases. This contingent requirement is identical to the situation in Brown [1976] where additional service was required to vest non vested benefits and the court was instructed to value the non vested benefit as if it were vested (assume the additional service required to vest would be performed) and then reduce the result to reflect the contingency that the required additional service would not be performed. To quote Brown [1976] “taking into account the possibility that. . . termination of employment may destroy rights before they mature. . . . discount factors to apply are neither readily available nor appropriate in the dissolution context as employment decisions are controlled by the employee spouse. . . . if the court concludes that because of uncertainties affecting the vesting or maturation of the pension, it should not attempt to divide the present value of pension rights, it can instead award each spouse an appropriate portion of each pension payment as it is paid.”

1. Salary Increase v. Inflation

In the present value process, the actuary discounts for anticipated future inflation. From an actuarial perspective, it is consistent and reasonable to assume that future salary will increase at a rate at least sufficient to offset some of the future inflation assumed in the interest rate used for discounting purposes. Actuarial principles require the actuary to use a set of assumptions that are consistent and reasonable. If an assumption is made for inflation in future years, is it not consistent and reasonable to expect future salary increases? Likewise, is it reasonable to assume future employment will continue without salary increases in an economic environment with inflation? Not only is there the question of what benefits are to be valued under the actuarial approach, but there is also the question of what absolute right a non-employee spouse has about receiving his/her share of the community interest in such benefits. Gillmore [1981] held that if the benefits have matured and the employed spouse continues to work, the non-employee spouse has a right to his/her share.

2. Absolute Right of Non-Employee

What absolute right does the non-employee have, if any, to an immediate share in vested but non matured benefits? Does the non-employee spouse have an absolute right to receive the actuarial present value of his/her share of whatever benefits are now available? From an actuarial viewpoint, the idea expressed in Gillmore that the non-employee spouse has an immediate right to his/her share is not dependent upon the benefits being mature. The idea can be extended to include vested and non vested benefits. However, as non vested benefits have no immediate value, such an extension would result in a valuation of zero which conflicts with the concept of Brown that non vested benefits have value for community property purposes. It might be reasonable to conclude that the non-employee spouse has an absolute right to force payment of his/her share of the actuarial present value of the community interest in any benefit that is available if employment were to terminate. However, if the non-employee spouse wants to wait and accept the decision of the court, then the non-employee spouse’s interest can be determined by the court using any of the available approaches to disposition.

3. Are Rights of Non-Employee Community Property ?

If the non-employee spouse has a benefit unavailable to the employee spouse (in this case, an absolute right), should the value of this right be subject to valuation for purposes of community property division? Does the exercise of this right exactly offset the potential, additional community value in pension benefits generated by the assumption that future service together with salary increases will occur? The non-employee spouse cannot have it both ways and receive additional increases. B

B. Hybrid Plans - Part Defined Benefit and Part Defined Contribution

Generally, if jurisdiction is reserved over pension benefits and each monthly retirement benefit is apportioned between separate and community property interests, the community share is based on the ratio of the years of service while married prior to separation to total years of service until retirement. What about the retirement benefits funded by member contributions made both before marriage and after marriage separation in a plan requiring member contributions, such as the State Teachers’ Retirement System or the Public Employees’ Retirement System? Should the portion of the benefit attributable to employer contributions be apportioned according to the time rule and the portion funded by member contributions be split by the direct tracing method?

C. Plan Established After Separation

What about a pension plan that is established after the marriage dissolution that provides benefits based, at least in part, on service performed during the community period? Should jurisdiction be retained to cover such a situation?

D. Transmutation of Community Property to Separate

What about pension benefits that would otherwise be community property that already have been assigned to the non-employee spouse by community agreement? For example, consider a case where the community was in existence throughout the employment period and, at retirement, the parties elected a form of settlement that provides a continuance benefit to the non-employee spouse upon the death of the employee spouse. Have the parties transmuted what otherwise would be community property into the separate property of the non-employee spouse? As the law stands, in order to transmute community property, a spouse must make an express designation containing language which “expressly states that the characterization or ownership of the property is being changed.” Many standard forms contain spousal consent clauses for beneficiary designations are now inadequate mechanisms to transmute community property under Civil Code #5110.730 (now Family Law Code #852). See Estate of MacDonald [1990].

E. No Social Security Benefits

Many public sector employees are not covered under Social Security. The public sector plan is designed to provide for the total retirement needs of the employee. Should an amount, equal to what Social Security benefits would provide, be excluded from apportionment between separate and community property interests? In Pennsylvania, Cornbieth v. Cornbieth [1990] held that a pension should be exempted from community property to the extent the pension might figuratively be considered “in lieu” of social security benefits.

F. Social Security Separate Property

Nizenkoff [1976] held that to regard Social Security as community property would interfere with express statutory scheme and Social Security Act.

Cohen [1980] held that Social Security is not subject to division and cannot be recognized by alternative provisions employing a set-off to the non-employee spouse.

Kelly [1976] held that Social Security benefits are separate property.

G. Bankruptcy

In a Shattuck [1982] situation, can the non-employee spouse afford to take a note for payment of the share of the community interest? Can the employee spouse then discharge the obligation for such a note by filing bankruptcy, thus keeping the entire pension? The entire pension was transmuted into separate property by the note, and the pension is exempt from the bankruptcy proceedings.

H. Redeposit’s

Lucero [1981] held that the right to redeposit withdrawn contributions to get increased benefits is a community property right. The non-employee spouse must make a pro rata share of the redeposit.

However, Forest [1979] disagreed with Lucero [1981] and held that the right to redeposit was too “tenuous an asset.”

I. Interest in Benefits Paid to a Subsequent Spouse

For State employees, CalPERS provides a one-half continuance benefit for safety members and either a one-half or one-quarter continuance benefit for non-safety members. To qualify for this benefit, a participant must have a spouse to whom he or she is married at death and to whom he or she was married at least one year prior to retirement. The benefit is paid to the surviving spouse for as long as she or he continues to live. In general, the benefit is one-half (or one-quarter) of the benefit that would have been paid on the life of the retired participant, had no optional form of settlement been selected. The level of the benefit is a function of all years of service. If some of this service was while married to a former spouse, does the former spouse have an interest (based on one-half the years of community service to total years of service) in the benefit being paid to the second spouse? The answer is “yes” and is found in Carnell.

J. Return of Pre marriage Separate Property Limited to Value at Marriage

Effective January 1, 1984, Civil Code #4800.2 (now Family Code #2640) provided that when dividing a community asset, unless there is a written agreement to the contrary, only monies paid to acquire said asset which are traceable to a separate property source are returnable. The statute provides that the court cannot increase the separate property interest by allowing interest on said funds or by adjusting for a change in monetary value due to inflation. If Civil Code #4800.2 (now Family Code #2640) is held to apply to defined benefit pension plans and not just to real property, as appears from the legislative history to be its primary intent, the result may be that any separate property interest will be limited to a return of employee contributions made before marriage and after separation a rather harsh result.