Defined benefit pensions, the ones that payout monthly, are strange animals. They are rare today except where unions and public agencies are found, and they can produce some odd results.
Carl Jagnow married his wife Sharon in 1983. They both taught school and both participated in the Public-School Employment Retirement System (PSERS). Husband retired in 2003 because of health issues and he was eligible to put his retirement into pay status at age 55. When he applied for his retirement he was asked to select between a single life benefit (his) or a benefit that would pay a portion of his pension to Sharon after his death (joint and survivor). In most settings, couples opt for the spousal benefit option. The monthly payment is less, but usually not a lot and once the participant spouse dies, the survivor gets a partial benefit for his/her life.
In this case, Carl chose the higher paying single life annuity. After all, Sharon was also in the PSER system and accruing her own benefit rights. So, Carl took the higher single life payout of $2,900 a month and supplemented it with his social security and some IRA money.
In 2013 Sharon also had some health issues and, at age 58m following Carl’s lead, she also took the single life annuity of $3,769 a month. She became social security eligible in 2013 at age 62 and took that benefit.
In 2013 Carl filed for divorce. The matter went to a hearing with the primary issue being what to do with the pensions. Wife argued that their decisions, while married, to each take single life annuities was effectively an agreement to leave things as they were. Husband said the pensions were marital property and needed to be divided equally. An expert was retained from one of the pension actuarial firms in our state, Conrad Siegel, Inc. The expert concluded that fairness would dictate that should husband die first, a portion of wife’s annuity should be paid to her husband’s estate. The master and the trial court approved the expert recommendation. Wife appealed. After all, if husband did die, why would money due to her from wages deferred until retirement go to the estate of someone no longer living?
Noting that it was applying an abuse of discretion standard, the Superior Court published decision of Judge Maryjane Bowes found that the trial court scheme was not an error. “Pension funds accrued during marriage, including state employees’ pension funds, constitute marital property that is subject to equitable distribution. See Hess v. Hess, 212 A.ed 520, 524-5 (Pa. Super. 2019). In ordinary cases, the court can adopt either an immediate offset scheme where the pensions are given a present value and then divided, or the court can use a deferred distribution scheme where the division occurs at retirement. Here, the parties elected to put their pensions into pay status well before separation. Once the choice is made between single life or joint and survivor annuity, that choice is irrevocable.
While there is merit to wife’s argument that both parties contemplated that they would not be sharing pensions when they took them, the argument kind of misses the mark. Husband ceased working and started to take his pension in 2003. That income went into the marital household and presumably kept it going. Wife continued to work another 10 years, with additional compensation being deferred during the marriage to augment her retirement benefit. Had the court adopted wife’s approach, husband would have never seen any benefit to that additional decade of pension contributions. It would have been effectively rendered “post separation” even though the marriage was intact while it accrued.
This issue could have been addressed via an immediate offset approach. At divorce, husband was 72 and had a single life annuity of $2,900. Wife was 66 and had a single life annuity of $3,739. If we look to Social Security tables, husband has a life expectancy of just over 13 years. Wife has an expectation of 19.65 years. Thus, if each die “as scheduled” by the Social Security administration, husband would collect $452,000 and wife would get $882,000. The problem with handicapping an immediate offset distribution is that there are more and more factors that go into the handicap as parties get older. Both these parties retired early because of health issues. We don’t know precisely what ailed them, but the typical actuarial table is built on a broad statistical population. Some time ago we handled a case involving a teacher pension where the teacher was afflicted with multiple sclerosis. There is demographic data to show that people with MS do not live as long as the general population. But even if you pair a physician with an actuary, neither expert is ready to opine with a reasonable degree of certainly just how many years are pared from life for the annuitant who has MS. In addition, MS affects people in different ways, just as there are cancer survivors who individually respond well to treatment while others have a form of the disease that could more likely recur or bring about an early death.
The lesson here is that defined benefit pensions are tricky. There was a superficial appeal to wife’sm “You keep yours; I’ll keep mine” approach. Meanwhile, the difference in approach would have brought her a huge benefit advantage over time. So, be careful out there and when dealing with these deferred compensation arrangements, get the help you need.