Berrington v. Berrington

MONTEMURO, Justice,

dissenting.

Before the majority decided the instant case, there were two distinct and well-defined methods of distributing a defined benefit pension plan; immediate offset and deferred distribution. Here, the majority departs from these two discrete methodologies by adopting a deferred distribution scheme which is an amalgamation of immediate offset and defined distribution concepts. Because this distribution is premised on a questionable valuation mechanism, which consequently fails to compensate the non-employee spouse for waiting to *415 receive her portion of the pension benefit, I cannot join the majority’s opinion.

To grasp the flaw in the majority’s reasoning, it is necessary to first understand how a defined benefit pension plan is funded, and then how such a plan should be evaluated for the purpose of equitable distribution. A defined benefit pension plan is a “form of deferred compensation [which is based on] a written plan established and maintained by an employer.” 3 W. Cantwell, W. Troyan, & H. Massler, Valuation & Distribution of Marital Property 45-10, 45-26 (1990) [hereinafter Valuation & Distribution]. M. Canan, Qualified Retirement and Other Employee Benefit Plans 133 (1989) [hereinafter Canan]. This type of pension is commonly funded via the accrued benefits method, or the projected benefits method. Valuation & Distribution, supra, at 45-26—27. If the accrued benefits method is used, the plan develops a set of actuarial assumptions for each employee, and then, based on these assumptions, determines the cost of that employee’s benefit for the year. Id. Under the projected benefits method, cost is not determined on a per employee basis, rather cost is determined on an aggregate basis for all employees. Id. However, no matter which funding method is employed, the plan starts with the conclusion, the amount the participant is entitled to receive at retirement under the terms of the plan, and works backward to the premise, that is, what amount the employer must set aside now to fund the future obligation. Canan, supra, at 134. This should assure that upon retirement, the retiree will receive the promised benefit.

Although an employer may fund the total cost of a defined benefit plan, such a plan “may provide for both required and voluntary contributions by the plan’s participants.” Canan, supra, at 142. This method of funding reduces the overall cost to the employer. However, the benefit available to the participant at retirement is still determined via a predefined formula which is set down in the written plan.

A problem arises when an individual, who is covered under a defined benefit pension plan, divorces before retirement. When this occurs, courts attempt to do economic justice *416 between the parties by equitably distributing the marital portion of the pension. Two methods have historically been used to effect economic justice between the parties; immediate offset and deferred distribution. With an immediate offset, the present value of the employee spouse’s defined benefit pension plan is determined at the time of the distribution hearing. King v. King, 332 Pa.Super. 526, 534 , 481 A.2d 913, 917 (1984). See, Sutliff v. Sutliff, 518 Pa. 378, 381-2 , 543 A.2d 534, 536 (1988) (property must be distributed with reference to its value at the date of distribution). The present value is calculated based on the following factors: the employee spouse’s salary at the time of separation; the date the employee will begin to receive the benefit or has a right to receive the benefit; the length of the employee’s employment during marriage; the total length of the employees’ employment; and, the appropriate mortality and interest discount rates. Evaluation and Distribution, supra, at chap. 45; Elhajj v. Elhajj, 413 Pa.Super. 578, 581 , 605 A.2d 1268, 1270 (1992). Once the present value of the marital portion of the benefit is determined, the court looks to whether there are sufficient marital assets to allow the employee spouse to retain full enjoyment of the pension, while giving to the non-employee spouse an offsetting portion of the other marital assets. Although immediate offset is preferred because it draws to a close the economic relationship between the parties, there are circumstances that preclude use of this methodology. W. Troyan, Pension Evaluation and Equitable Distribution, 10 Fam.L.Rep. (BNA) No. 4, Monograph No. 1, p. 3006 (November 22, 1983) [hereinafter Troyan]. For example, immediate offset is inappropriate when the pension has not vested, Lyons v. Lyons, 401 Pa.Super. 271, 280 , 585 A.2d 42, 47 (1991), or when there are insufficient marital assets to effectuate the setoff, Elhajj, 413 Pa.Super. at 581 , 605 A.2d at 1270 ; King, 332 Pa.Super. at 534 ; 481 A.2d at 917 ; Troyan, supra, at 3006. Under both situations, distribution must be deferred until the employee spouse’s right to receive the benefit matures. Lyons, 401 Pa.Super. at 280 , 585 A.2d at 47 ; Troyan, supra, at 3006.

*417 If circumstance dictates that distribution be deferred, “a simple formula is devised which makes possible the future division of benefits pursuant to an allocation formula [set down] at the time of divorce.” Valuation and Distribution, supra, at 45-60. This formula is simple because there are no present value calculations to be done, nor should any such calculations be made. Id.; Troyan, supra, at 3007; Elhajj, 413 Pa.Super. at 581 , 605 A.2d at 1270 ; Endy v. Endy, 412 Pa.Super. 398, 403 , 603 A.2d 641, 643 (1992). Rather, the coverture fraction 1 is determined so that the portion of the pension benefit earned during marriage may be calculated. Once the fraction is determined, it is multiplied by the actual benefit available when the pension enters pay status. This simplistic method both attains economic justice, 23 Pa.C.S.A. § 3102(a)(6), and complies with the mandate of the Divorce Code that only marital property is subject to equitable distribution, 23 Pa.C.S.A. §§ 3501 and 3502, because the coverture fraction separates the marital from the non-marital portion of the benefit. Therefore, with the passage of time, “the non-employee spouse will receive a decreasing percentage of an increasing benefit.” Troyan, supra, at 3007.

Here, the majority has placed its imprimatur on a valuation scheme that allows for future distribution of the present value of a defined benefit pension plan. This freezes the non-employee spouse’s share of the pension benefit at its date-of-separation value. Thus, when the benefit enters pay status, the non-employee spouse will begin to receive a benefit which has decreased in value through the passage of time. The majority attempts to compensate the non-employee spouse for the loss of the time value of money by allowing her to share in “increases in retirement benefits ... which are not attributable to the efforts or contributions of the participant spouse.” (Maj. op. at 403). However, with a defined benefit pension, *418 such increases are nonexistent as the benefit is predefined under the terms of the plan. Thus, the non-employee spouse will not receive an equitable share of the pension benefit. 2 Accordingly, I believe that the majority erred when it departed from the deferred distribution formula advanced by the commentators, See, Valuation and Distribution, supra, at 45-GO, Troyan, supra, at 3006-7, and ordered the deferred distribution of the present value of a defined benefit pension plan. 3

In addition, a departure from the traditional deferred distribution methodology is not necessitated merely because the instant plan is funded by contributions from both the employer and employee. The fact remains that this plan is a defined benefit plan. Thus, the method of funding should not affect the manner in which a deferred distribution is accomplished. However, if the instant plan was a defined contribution plan, rather than a defined benefit plan, it would be appropriate to determine the present value of the employee spouse’s contributions to the plan. Once a present value determination is made, which is the balance in the employee spouse’s contribution account as of the date of separation, the marital portion of the account (i.e. the coverture fraction) is calculated, and then equitably distributed between the parties. If distribution of this sum is to be deferred, the plan must place the non-employee spouse’s share of the pension into a separate account where it will remain until the non-employee spouse’s right to the benefit matures. During this period, any interest or dividends earned by the account accrue only to the non-employee spouse’s benefit.

*419 In sum, if the non-employee spouse is entitled to a pension benefit based on the employee spouse’s salary at separation, the benefit should not be further reduced by the coverture fraction. To freeze the salary, and also bar the spouse from sharing in post-separation increases to the benefit, which arise solely from the time value of money, works an injustice to the non-working spouse. Thus, I cannot join the majority’s opinion. Accordingly, I respectfully dissent.

. The coverture fraction represents the portion of the benefit which was earned during marriage. “The numerator of the fraction is the total period of time the employee spouse was [a] participant in the plan from date of marriage until date of separation, and the denominator is the total period of participation in the plan.” King, 332 Pa.Super. at 533 , 481 A.2d at 916 .

. After ordering the deferred distribution of the present value of a defined benefit plan, the majority then requires that this amount be further reduced by the coverture fraction. Because the coverture fraction was used to calculate the present value of the benefit, it defies logic to use the fraction to further reduce the benefit when it enters pay status.

. If the majority truly aspires to do economic justice between the parties under the instant distribution scheme, they could award the non-employee spouse the present value of the benefit plus a reasonable rate of return on this sum from the date of valuation to the date the pension enters pay status. Although I do not advocate the adoption of this approach to deferred distribution, such a scheme is more equitable than the one adopted here.