The Value of Your Pension is NOT the Account Balance
There Are Two Fundamentally Different Ways to Divide a Pension in Divorce
Massachusetts Formulas for Dividing Pensions: Relative-Time, Brightline, and Everything in Between
Download 4 Step Decision Guide for Dividing MA Pensions in Divorce
Pensions are considered marital property that can be divided between divorcing spouses, just like a house or bank account can be divided. For many Massachusetts couples, a public pension—whether MTRS, MA SERS, MBTA, State Police or other state, county, or town pension—is the largest asset that they own. Even though the person who is earning a pension at their job might not begin drawing on that pension for decades, the pension has a value that needs to be divided during divorce. If you don’t understand how pensions work in divorce, it could cost you many tens of thousands of dollars.
If I serve as your divorce mediator, I will explain to you and your spouse all of this information in order to empower you to make choices that work best for you.
All Massachusetts public pensions—from the largest state pensions to the smallest town pensions—are governed by MA General Law Chapter 32, which has over 100 sections.
Dividing Massachusetts public pensions in divorce is very complicated, and many divorce lawyers do not understand them well enough to explain them to you or include necessary language and details in your divorce agreement about how they should be divided.
Understanding and dividing MA public pensions in divorce is complicated for 4 basic reasons. These 4 reasons are briefly introduced here and then discussed in more depth, below:
I) The value of a pension is not the amount of money a participant and the employer have contributed to the account, and the value is not the “balance” in the account that might be listed on the annual statement. Read more
II) There are two fundamentally different ways of dividing a pension in divorce:
1) The future stream of pension benefit payments can be divided so that each spouse gets a part of the monthly pension benefit payment in the future, when the payments start at retirement. With this method, no one gets any money at the time of divorce: it all happens after the pension participant retires.
2) The person with the pension can “buy out” the other person at the time of divorce and keep the entire future stream of pension payments for themselves. Read more
III) If the couple decide to share the future stream of pension benefit payments, Massachusetts allows many different ways of calculating how much of each payment that each spouse should get. If your separation agreement uses general language such as, “The marital portion of the pension shall be shared equally”, the pension can be divided in different ways with different outcomes. Using one method rather than another can cost you (or save you) tens of thousands of dollars. When you divide Massachusetts pensions in divorce, the laws say that sometimes 2+2=4 and sometimes 2+2=3. Read more
IV) Details of Massachusetts public pensions and their division in divorce are governed by highly specific laws in Massachusetts General Law Chapter 32. These include the impact of combinations of the following factors:
Each year your pension system may send you a statement with your “Annuity Savings Account” balance or your “Total account balance”, but once you are vested, this balance has almost nothing to do with the actual value of your pension. You cannot simply divide this account balance in half when you divorce. Once you are vested, your pension is worth much, much more than this account balance. I recently reviewed a state pension that had a Total Account Balance of $260,000. The true value of that pension– the actuarial present value–was over $1.4 million!
If your future benefit payments will be $40,000 per year and you are likely to live for 20 years after retirement, you will be receiving over $800,000 in pension benefits. This can help you see why the value of a pension is so much higher than the “Annuity Savings Account” balance or the “Total Account Balance.”
The amount of your eventual pension benefit payments is based on a state formula that takes into account 1) your average salary over your highest 3 years of salary (or for MTRS and SERS Tier 2 members, highest 5 years), 2) the number of years of service you have (this can include purchased service), and 3) the age at which you retire. State Police have a different formula, which is based just on years of service and final 12 month salary. MTRS members can calculate the value of their future monthly pension benefit on this MTRS calculator page; MA State Police (SERS Group 3) can calculate their pension payments at this unique State Police calculator page; and MA SERS members can use this MA SERS calculator page.
A pension is a promise to pay a pension participant a certain amount of money per month after retirement until the participant dies. There are two different ways of sharing this pension.
1) One method of sharing the pension is to share the future monthly payments in the future, when the pension participant retires. That means that if you divorce a person who has a pension, you get no money at the time of the divorce. Instead, you will get a part of that person’s monthly pension benefit in the future, when that person retires.
This method of division is sometimes called the “deferred distribution method” because the actual division of the asset is deferred, or put off, until a time in the future. The separation agreement (divorce agreement) simply gives instructions on how those future payments should be divided and shared. These instructions are translated into a QDRO (Qualified Domestic Relations Order). You can get divorced without doing a QDRO, but no pension adminstrator will divide your pension benefits unless you have a QDRO.
Massachusetts allows a range of very different ways of calculating how much of the future pension benefit each person should receive. The method chosen can have very, very large effects on how much money you receive, so it is important that you understand the different methods and their financial consequences. This will be discussed and illustrated in the section “Massachusetts Formulas for Pension Division,” below.
Many MA divorce mediators, divorce lawyers, and family court judges do not understand these different methods or their financial implications. As a result, many separation agreements do not specify how the pension will be shared, and probate judges routinely approve these faulty separation agreements
2) A second method of sharing the pension is to calculate the lump sum present value of the pension at the time of the divorce and share that value. This is sometimes called the “immediate offset method” of pension division, because the value of the pension is divided immediately, in the present. The present value of the pension is offset by the value of other assets that the couple might have, such as a house, social security, or other retirement accounts. In simple terms, the “present value” of a pension is a lump sum of money you would have to give to someone in order for them to guarantee you particular lifetime monthly benefit payments.
For example, if you are a female 49-year-old MTRS member who has enough service and salary to receive a monthly payment of $3,000/month starting at age 60, the present value of that pension is $517,911 (Yes, it is a lot of money!). The calculation required to find the lump sum value of a pension is called an actuarial present value pension calculation. It makes thousands of calculations based on how old a person is, what their monthly benefit will be, how many years until the pension payments start, current mortality charts (how likely is it for a male or female of a given age to survive another year?), and what long-term interest rates are.
If a couple want to use the “immediate offset method” and buy one spouse out of the pension, the couple would need another large asset such as a house or another pension (including Social Security) to offset, or balance out, that pension. One spouse might keep $300,000 of house equity, for example, while the other spouse keeps all of their future pension benefits, which have a present value of $300,000. Many couples cannot afford for one spouse to “buy out” the other spouse, so they must use the “deferred distribution method” and wait until the pension participant retires in order to share the value of the pension.
The value of future Social Security payments can also be calculated and the marital portion shared, through a present value calculation. Federal law prohibits the sharing of Social Security benefits through the “deferred distribution” method, using a QDRO. Individual, future Social Security payments cannot be split, with separate checks mailed to each ex-spouse after retirement. This prohibition has led to a widespread misconception that that the value of Social Security payments cannot be taken into account in the division of assets and divided in divorce. This is a mistaken belief that leads many MA divorce attorneys and judges to ignore the value of future Social Security benefits when dividing assets in divorce. Courts and attorneys regularly divide a spouse’s pension in divorce but ignore the fact that the other spouse has valuable, future Social Security benefits. This is especially important in cases where one spouse has a MA public pension (and will not receive any Social Security) and the other spouse will have substantial Social Security benefits. See this blog post for discussion of this issue.
You can follow instructions in this blog post to calculate the present value of future Social Security payments.
When you divide Massachusetts State Pensions in divorce, sometimes 2+2=4 and sometimes 2+2=3. Massachusetts law does not specify a particular method for how pensions should be divided “equally” or “fairly” so a court (or couple) can use very different kinds of methods, with very different financial outcomes, for determining how much of a pension benefit each ex-spouse will receive.
At one extreme is the “bright line,” or “accrued” method, which usually favors the pension participant and gives less to the ex-spouse. This method is only legal in 10 states. At the other extreme is the “relative-time”, “projected”, “coverture”, or “fractional allocation” method, which most analysts find the fair method of pension division. This method is required in 40 US states.
Massachusetts is the only state in America that allows both of these methods (and some in between) for dividing the value of a pension. Actuarial financial experts Altschuler and Kelly in Value of Pensions in Divorce (Section 13.06), note that “Massachusetts strikes us as one of the oddest….clients with similar fact patterns can end up with totally different property settlements—even when the cases are held in adjoining courtrooms.”
The chart below illustrates the dramatically different financial outcomes that result from different methods—”relative-time”, “bright line”, or an intermediate method—of dividing a MA state pension. The differences all hinge on whether you use the divorce date or the retirement date for the three factors that go into the pension benefit calculation. MA state law allows either.
Massachusetts state pensions (Groups 1, 2, and 4) are calculated from three factors: age, years of service, and high-3 (or 5) year average salary. If you use age, years of service, and average salary from the divorce date—the bright line method—the factor numbers are all low and they generate a low pension benefit to be shared. (Note that for Group 3, State Police, there are only two factors: years of service and average salary from 12 months immediately prior to retirement.)
Many people use the term “frozen” to describe factors that are fixed, or frozen, at the time of divorce. The bright line method freezes all three factors at the divorce date.
If you use the age, years of service, and average salary from the retirement date, the factor values are all higher and generate a much larger pension benefit (“relative-time” method) to be shared. In Massachusetts, it is possible to divide pensions using methods in which all, some, or none of these factors is frozen. The chart below illustrates financial outcomes with varying combinations of frozen and not-frozen factors. Depending on the method chosen, the ex-spouse of a typical school teacher could receive as much as $1473 per month, or as little as $347 per month!
This site now has a unique, interactive MA state pension division calculator for divorce that allows you to see how much pension benefit that you and your ex-spouse might each receive based on your situation, using each of the different kinds of formulas that Massachusetts allows.
The numbers in the example below are generated for a public school teacher who divorces at age 47, after 22 years of teaching and 17 years of marriage, and has earned an average salary of $70,000 over the prior three years. The person plans to continue teaching until age 60, when they expect to be averaging a salary of $91,000 over their final three years (this assumes 2% raises each year between age 47 and 60).
Assumptions for this MTRS teacher example :
Date of Birth: 01/01/1970
Date of Hire: 01/01/1995
Date of Marriage: 01/01/2000
Date of Divorce: 01/01/2017
Highest 3-year Average Salary at Date of Divorce: $70,000
The MTRS member participates in “Retirement Plus” and is not a veteran.
Predicted Date of Retirement: 01/01/2030
Predicted Highest 3-year Average Salary at Predicted Date of Retirement: $91,000
“Y of S” in the chart below stands for “Years of Service”
A “marital coverture ratio” of .4857 is used for all methods except for #7, the bright line method. The couple were married for 17 years out of a projected career of 35 years of teaching, so 17/35, or .4857 of the pension benefit belongs to the marriage.
The marital coverture ratio for #7, the bright line example, is .7727. The bright line method calculates what a pension participant would get if that person retired completely on the date of divorce, which generates a relatively small pension. In this case, the couple were married for 17 years of the 22 years during which pension credits were accumulated, so 17/22, or .7727, of the pension benefits belong to the marriage. The bright line method gives a higher marital coverture ratio of a much smaller pension.
Massachusetts has very specific rules about what beneficiaries (typically spouse or ex-spouse) receive in benefits if the participant dies. An important distinction is whether the pension participant dies before retiring or after retiring (when the pension is in “payout” status).
Participant Death before Retirement (and after Divorce): Option D
Option D is not really an “option”–it is automatically active before retirement. It is the only benefit that applies if a participant dies before retiring. It has two parts: a 12(2)d member-survivor part and an 11(2)c lump-sum part.
During marriage, the spouse, after a year of marriage, is the default member-survivor, or 12(2)d beneficiary, but a MA SERS participant can also fill out a SERS Option D Form for Active Members to specify a different member-survivor beneficiary, who can only be a child, parent, sibling, or former spouse who never remarried. The benefit and beneficiary are referred to as “member-survivor”, or “12(2)(d)”, after section §12(2)(d) of Chapter 32 that specifies this benefit. If the member has an eligible spouse (married for more than 1 year), the eligible spouse would have to waive their right to any pension benefits (which is probably unlikely) in order for a different beneficiary to receive them.
The 11(2)c, lump-sum benefit is generally less valuable but more flexible about beneficiaries. This death benefit, unlike the 12(2)d benefit, can have multiple beneficiaries, and it can have contingent beneficiaries. It pays the beneficiary the “annuity savings account” balance that was in the participant’s account. The 11(2)c, lump-sum benefit is only paid if there is no beneficiary for the 12(2)d member-survivor benefit. MA SERS members select their 11(2)c beneficiary on this MSRB 11(2)c lump sum beneficiary selection form.
The 12(2)d, member-survivor benefit can be very valuable to an ex-spouse who has not remarried, because if the participant (who has not been married for a year to a new spouse) dies before retirement, the member-survivor beneficiary receives the equivalent of the Option C lifetime of pension benefit payments. This member-survivor benefit can have a value as high as hundreds of thousands of dollars.
MTRS members, unlike MA SERS members, have a single form on which they can specify a 12(2)d member-survivor beneficiary and/or an 11(2)c lump sum beneficiary. Download this MTRS Beneficiary Designation Form here.
If you are divorcing a person who is participating in a Massachusetts State pension, you will want to specify in your Separation Agreement (and accompanying QDRO) that you will be designated the Option D, 12(2)d, member-survivor beneficiary. When the judge signs the Separation Agreement, it is a court order and the pension participant must follow it.
If your ex-spouse with the pension remarries before retirement, the new spouse automatically becomes the new Option D 12(2)d member-survivor beneficiary of the pension after 1 year of marriage. It does not matter what your Separation Agreement says. The new spouse has the right to the benefit, even if you were married 25 years and the new spouse was only married to the participant for 1 year.
If you are the member-survivor, 12(2)d beneficiary of your ex-spouse’s pension and you re-marry before the participant’s death, you also lose any right to the member-survivor, 12(2)d benefits.
If the participant remarries, the ex-spouse also loses the right to the 11(2)(c) lump sum
However, if the participant’s ex-spouse remarries, the ex-spouse can still be the beneficiary of a lump sum payment from the “annuity savings account” under §11(2)(c) of MA General Laws Chapter 32.
Participant Choice of Option A, B, or C at Retirement Date
When the pension participant retires, he or she must choose Option A, B, or C for distribution of retirement benefits. Option D and any Option D choices disappear when the participant retires.
Option A provides no benefit to survivors. It provides lifetime monthly payments to the participant, which end when the participant dies.
Option B can provide a lump sum to survivors when the participant dies if there is any money left in the “annuity savings account”. All the money in this account is typically gone after about 12 years of retirement. The balance decreases each year based by the amount of the annuity portion of the annual pension payments. As described in Section I, above, the value of lifetime pension payments is almost always greater than the balance of the “annuity savings account.” An Option C stream of payments, below, is therefore typically much more valuable to a survivor than an Option B lump sum. The pension participant who chooses Option B receives a monthly benefit that is about 1%-5% less per month than if the participant chooses Option A. (If the participant is 50 at retirement, the reduction is about 1%; if the participant is 70 at retirement, the reduction is about 5%. A 50-year-old is very likely to use up all of the annuity savings account before dying, so the benefit is reduced very little. A 70-year-old participant is much more likely to die and pass on an annuity savings account sum, so that person’s Option B benefit is reduced by about 5%.)
Option C provides a lifetime monthly allowance to the beneficiary if the participant dies before the beneficiary. The survivor benefit is 2/3 of the benefit that the participant is receiving at the time of death. (This beneficiary benefit is sometime referred to as the §12(2)(d) benefit, after the section of MA General Law 32 that addresses it.) This option provides the greatest security to the beneficiary and typically provides the greatest amount of money. The pension participant who chooses Option C with a beneficiary of similar age receives a monthly benefit that is about 10% less per month than if the participant chose Option A. If the participant chooses their child as the beneficiary, the Option C benefit will be reduced by about 23%, if the child is 35 years younger than the participant. (If the beneficiary is old, the benefit is reduced little, as the beneficiary is unlikely to live a long time and collect the survivor benefit for long. If the beneficiary is young, the benefit is reduced a lot because the beneficiary is likely to live for a long time and collect the survivor benefit from the state for many years.)
If your spouse has a pension, you want the Separation Agreement (and accompanying QDRO) to specify that he or she choose Option C and designate you as the Option C beneficiary. When the judge signs the Separation Agreement, it becomes a court order, and your ex-spouse must then choose Option C and make you the beneficiary. It’s best practice to get a QDRO and send it to the pension administrator so that the pension administrator knows there is a court order. Otherwise, the pension administrator will not know, and the pension participant might try to choose a different option or make a different person a beneficiary (even though the Separation Agreement forbids this).
The participant’s remarriage (regardless of whether before or after retirement) has no effect on the alternate payee’s eligibility to be the Option C beneficiary. (This is different from the Option D beneficiary, described above.)
It DOES matter if and when the alternate payee remarries. If the alternate payee remarries BEFORE the pension participant retires, the alternate payee cannot be the Option C beneficiary. The only people who can be Option C beneficiaries are the participant’s current spouse, parent, former spouse who has not remarried, sibling, or child.
The alternate payee CAN remarry AFTER the participant begins receiving (Option C) benefits without affecting the alternate payee’s status as Option C beneficiary.
Because the alternate payee cannot be chosen as the Option C beneficiary if he or she remarries, the alternate payee may also want to specify a fallback position in the Separation Agreement. Specifically: If your spouse has a pension, you want the Separation Agreement (and accompanying QDRO) to specify that you are the Option C beneficiary but that if you remarry before your ex-spouse participant chooses a retirement option, he or she must choose Option B and designate you as the Option B beneficiary. When the judge signs the Separation Agreement, it becomes a court order, and your ex-spouse must then choose Option B and make you the beneficiary. That way you will be the Option C beneficiary if you are not remarried. And if you ARE remarried, you will be the Option B beneficiary.