“After The Love Has Gone’” or “Divorce And The Defined Benefit Pension”

October 20, 2021 | Salvatore Darigo, Chief Counsel’s Office | Terms & Disclaimers

Neither family lawyers nor Earth, Wind and Fire can use a ‘70s ballad to solve the issue of who gets what when marital property is divided as part of a divorce.  In most cases, distributing marital assets is the second most important concern after child custody. When a defined benefit (“DB”) pension such as the one earned by SERS members is tossed into that mix, a complicated and emotionally-charged issue becomes even more complex and confusing. 

Before getting into the nuts and bolts, I need to make a confession – I went to law school mainly because the LSAT was the only graduate school admission test that didn’t have a math section. Of course, when I went into private practice I started doing a lot of family law including marital separation agreements, prenuptial agreements, and equitable distribution schedules. Because my clients didn’t take kindly to my saying: “I was told there would be no math,” I quickly learned the ins and outs of calculating each party’s respective share of their marital property.  

Sharing and the Coverture Fraction

One of those concepts is the “Coverture Fraction.” In Pennsylvania, when the spouse of the owner of a DB pension is awarded a share of that pension, he or she is entitled to receive a share of the increase in the value of the pension not attributable to the financial contributions made by the owner after the period of the marriage. The idea behind this concept is that the pension earned by the member during the marriage required him or her to make financial contributions with money that would have otherwise been available to the marital household. The Coverture Fraction breaks out the proportional share of the final pension benefit that was earned during the marriage and allows the other spouse (“Alternate Payee”) to share in the increase in value of the pension resulting from those marital contributions attributable to the member’s post-marital credited service and “final average salary” (FAS). A member’s FAS is the average of a member’s compensation over a particular period of time, which is used to calculate their retirement benefit. The period of time used to calculate the FAS depends on the member’s class of service.

If the former spouse of a member (“Alternate Payee”) is awarded the right to receive a portion of a SERS member’s DB pension, they will receive it “if, as, and when” the member receives his or her benefit. That means the Alternate Payee doesn’t get an immediate lump sum from the member’s pension; he or she must wait until the member starts to get paid and then receive a portion of each payment made to the member. If the parties calculate the Alternate Payee’s share using the value of the pension as of the date the parties separated, the Alternate Payee’s proportional share of the benefit gets smaller and smaller as time goes by and the member approaches superannuation. This happens because the value of a defined benefit pension increases steadily as the member continues to earn credited service and pay raises. Because the Alternate Payee couldn’t use the money that flowed into the pension when it was actually earned, the Coverture Fraction gives the Alternate Payee the benefit of that money when it is actually paid out.

The Coverture Fraction formula is as follows:

(length of the marital period)  x  (amount of benefit) = marital share
(total credited service)

(marital share) x (percentage awarded to Alternate Payee) = Alternate Payee’s share

Slicing Up the Pie

Think of a DB pension as a pie. When a member retires, the pie consists of a number of slices equal to the member’s total credited service. Each of those slices represents a percentage of the member’s FAS. For purposes of this example, let’s presume that the member has 30 years of Class AA service, was married for the first 10 years of their career, and has an FAS of $40,000 on the marital separation date. At the time of retirement, the member has worked up to an FAS of $75,000. To keep it simple, we’ll also assume that when the parties divorced in year 10,  they agreed to a straight 50/50 split of a Maximum Single Life Annuity with no lump sum withdrawal and no death or survivor benefits. Using SERS’ basic formula, the member’s benefit at retirement at superannuation age is calculated as follows:

30 [years of service] x 2.5% x $75,000 [FAS] = 75% x $75,000 = $56,250/year
             
If you calculate the marital proportion of the benefit in year 30 using the value of the benefit in year 10, the numbers look like this:

10 [years of service] x 2.5% x $40,000 [FAS] = 25% x $40,000 = $10,000/year

When the parties separated, each of the 10 years of credited service earned during the marriage was worth $1,000. The withdrawal (early retirement ) factor doesn’t come into play because the member is superannuated when payment is actually made to the Alternate Payee. 

However, when the member retires and the Alternate Payee starts to get paid, each of those same 10 years is now worth $1,875 because the increases in the member’s FAS and total credited service increased the value of the 2.5% share of FAS earned for each year of credited service. Using the Coverture Fraction to calculate the Alternate Payee’s share using the value of the defined benefit at the time of retirement, the equation works out like this:

10 x $56,250 = $18,749                     $18,749 x .50 = $9,374.50
30

If the parties divided the pension payable as though the Member retired on the date of separation, the Alternate Payee would receive 50% of $10,000, or only $5,000.  As you can see, the use of the coverture fraction almost doubles the value of the Alternate Payee’s share of the pension. 
             
Although DB pensions are not as commonplace as they once were, most active members in SERS (except for a relatively small number of people who have elected the straight defined contribution plan) are earning a defined benefit of some kind. Knowing how defined benefit pensions work and what can be done to distribute them in a divorce can go a long way toward making sure an equitable distribution is truly equitable.

Once the amount due an Alternate Payee has been calculated, the information necessary to identify and pay the Alternate Payee when payment comes due must be provided to SERS in a Domestic Relations Order. (More about that aspect in a future edition.)

Salvatore Darigo is an attorney in the Chief Counsel’s Office of the State Employees’ Retirement System.

This article is presented as general information and is not legal advice.  No lawyer-client relationship is created or inferred.  SERS does not provide legal or professional advice to members or participants. Members or participants with legal questions should consult an attorney.