Marital Property in Illinois Public Pension Plans (PART I):Actuarial Valuation, QILDROs and the QILDRO Discount

• Illinois Pension Code (40 ILCS 5/1-119) sets forth the statutes that control the division of Illinois Public Retirement Plans through QILDRO.

• ILCS 5/1-119(b)(1) provides in part an Illinois court of competent jurisdiction in a proceeding for dissolution of marriage…may order that all or any part of any (i) member’s retirement benefit, (ii) member’s refund payable to or on behalf of the member, or (iii) death benefit, or portion thereof, that would otherwise be payable to the member’s death benefit beneficiaries or estate be instead paid by the retirement system to the alternate payee.

• ILCS 5/1-119(b)(4) provides in part the QILDRO may not address any survivor’s benefit.

• ILCS 5/1-119(g)(1) provides in part that upon the death of the alternate payee under a QILDRO, the QILDRO shall expire and cease to be effective, and in the absence of another QILDRO, the right to receive any affected benefit shall revert to the regular payee.

The above statutes permit the former spouse to receive an interest in the monthly retirement while member and former spouse are both alive, a refund of member contributions or the small death benefit (defined as “any nonperiodic benefit payable upon the death of the member”), but specificallyexcludes the former spouse’s right to receive any survivor benefit nor the ability to name a beneficiary if the former spouse should predecease the member.

Actuarial Valuation: When calculating the actuarial value of the marital estate in an IL public pension, it is customary to value the member’s single life annuity and apply the Hunt formula (Marriage of Hunt, 78 Ill. App. 3d 653, 397 N.E.2d 511 (Ill. App. Ct. 1979) to determine the marital share. For example, assume a member’s TRS single life annuity of $2,000/mo is worth $486,000 in today’s dollars (actuarial assumptions: parties both age 60, PubT_2010 mortality, MP-2021 improvement applied generationally, 5.2% FTSE discount, 3.0% COLA). If the court awards a former spouse 40% of the total pension, the former spouse’s share would be worth $486,000 x 40% = $194,400 assuming the member lives to the actuarial projected life expectancy -as there are no joint and survivor benefits for former spouses under the Illinois Pension Code.

But as detailed above, this valuation has a grave potential to be an overvaluation as it is based on general probabilities rather than the reality of a single member and former spouse’s life expectancy. Simply put, the parties nor their counsel have a crystal ball in regards to exactly how long the member and former spouse will live.

Pursuant to Anne P. Schmidt, Illinois Employee Benefits Attorney, an actuarial valuation has the ability to drive settlement in either direction. For the member they can be shocked with the amount of money that would be required to “buy” someone out of their pension based on interest rates and remaining projected life expectancy which the member may never achieve; and for the former spouse they could be leaving years “on the table” by accepting an undervaluation in hopes of reducing their risk and achieve a lump sum value today.

Pension valuations can also promote prudent conversations about the member’s pension and the security both parties expect to derive from it. For example, in a gray divorce engaging a valuation will drive conversations about obtaining life insurance for the former spouse to protect against the risk of the member predeceasing the former spouse, and force productive conversations about retirement and cost of living as a retired person to prevent post decree litigation and budgeting issues.

Perhaps most importantly, a valuation can allow you to work with someone who understands the rights and features of Illinois Pensions and prepare you for the nuances of these non-ERISA plans. In my next article (Part II), I will dig into the forced reversion component of Illinois pensions as detailed in ILCS 5/1-119(g)(1) which adds another layer of how you might want to value these plans.