Dividing Pensions in Divorce Mediation Part 1

For divorcing couples who received a pension and are retired and collecting, when diving pensions in divorce mediation how are they handled, especially when they are in pay-out status?  Are they assets that are subject to equitable distribution or are they income streams that should serve as part of the spousal support / alimony discussions? Like most NJ divorce mediation issues, the answer isn’t clean cut and it’s best for the parties to decide.  For this article I am going to assume they are standard pensions and not public pensions as those have a high level of complexity requiring further explanation. 

I put this question to my colleagues and like most NJ divorce mediation issues the results came back split.  Some colleagues were convinced the law treats them as assets subject to equitable distribution and some believed they would be treated as income streams and should factor into spousal support / alimony.  So if you’re talking about diving pensions in divorce mediation, what should you do?  As a NJ divorce mediator I can’t tell you what to do so for today’s post, I am going to focus on the issues surrounding pensions as an asset subject to equitable distribution and in my next post, I’ll focus on them as an income stream and how they may factor into spousal support / alimony and let you decide.

When a pension is treated as an asset subject to equitable distribution, the first thing we need to do is get it valued.   Calculating present value for pensions is a complex exercise so it’s best to have a third-party evaluator do it for you.  Factors include, but are not limited to:

1. Years of eligible service
2. # of years you were married while in the pension plan (the coverture fraction)
3. Mortality tables
4. Your earnings
5. Service breaks

In theory the company was putting away a certain amount of money on your behalf for every year you were eligible so that when you retired and began collecting, the funds would be there for you.  That is the value we are looking to calculate.

Next we would compare the value of this asset along with your other marital assets and liabilities and see how your balance sheet works out.  Is the pension the only retirement asset you have while your spouse has a lot of 401(k) funds and IRA’s?  Do you both have pensions and if so, what is the present value of their pension?  And since you can’t exactly walk up to the window at your old company and say “Hi I’m getting a divorce, I need you to give my ex-spouse $300,000″ how will you get those assets to them?  Will they be through the exchange of other retirement or non-retirement assets?  Or can the other spouse collect a fraction of your monthly payment?  All good topics to discuss in NJ divorce mediation sessions.

When treating pensions as assets subject to equitable distribution, some clients feel it’s a “clean break” and don’t have to interact with their ex once the divorce is final. Other issues to consider include if your ex dies, can you still collect on their pension and what happens if they get remarried?  On the flip side, if the pension is the only retirement asset the two of you have, then there may not be another retirement asset to trade to offset the value and you may need to treat the pension as an income stream and receive some of that in the form of a monthly spousal support / alimony payment which we’ll discuss in my next article.

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Joseph Dillon is an Accredited Professional Divorce Mediator in NJ and Managing Partner of Equitable Mediation Services a firm dedicated to divorce mediation in New Jersey.  Please feel free to call us at (908) 864-2177 or send us a message.