Category: Expert Witnesses

Present Values, Trial Court Discretion, and the Value of Expert Testimony

Present Values, Trial Court Discretion, and the Value of Expert Testimony

Forman v. Forman, 3rd Dist. Marion No. 9-13-367, 2014-Ohio-3545 (August 18, 2014)

Issue:  Did the trial court abuse its discretion by accepting the expert witness’ opinion that using the Pension Benefit Guaranty Corporation (PBGC) market-based approach was the most equitable method to value pension benefits?

Decision:  The Third District Court of Appeals held that the trial court did not abuse its discretion.  In determining the present value of a defined benefit plan, or other benefits that are similar to a defined benefit plan such as social security, there are two commonly accepted methods.  One method is referred to as the “Internal Revenue Code” or “IRC method.”  This method values benefits using the minimum lump sum cash out that a participant can receive, pursuant to the provisions of the Internal Revenue Code, from the plan at the time of divorce. 

The second method of determining the present value of a defined retirement benefit is referred to as the “PBGC method.”  The PBGC, a government entity that oversees and guarantees a certain level of benefits of qualified defined benefit plans, commissions a life insurance council to check for the market values of annuities with dozens of insurance companies.  The purpose of this review is to assess a market value for replacing defined retirement benefits.  Under the PBGC method, the present value of the retirement benefit is determined by using the PBGC data to assess what it would cost to receive a similar benefit through an annuity in the market.

In this case, at the trial court, Dave Kelley from our office testified that the PBGC method should be used to value the defined benefit plan and the social security benefits at issue.  The opposing witness advocated for the IRC method.  As was explained to the trial court, the IRC method always results in a lower present value.  As such, it results in a lower benefit to the alternate payee.  In this case, the difference in the valuation was approximately $220,000.  The trial court accepted Mr. Kelley’s recommendation and used the PBGC method to value the benefits at issue as it found said method was the most equitable method of valuation for the case.

On appeal, it was argued that the trial court abused its discretion in accepting Mr. Kelley’s opinion.  In response, the Third District stated, in part:

We conclude that the trial court did not abuse its discretion in determining that Kelley’s valuation of [Defendant’s and Plaintiff’s] pension and retirement benefits was the most equitable.  The trial court heard the testimony of Kelley and [William] Napoli [the other expert witness] regarding the PBGC and IRC valuation methods used to calculate the present value of [Defendant’s] STRS pension benefits. . . .  The fact that Kelley’s valuation of [the] STRS retirement benefits resulted in a larger amount than Napoli’s valuation does not amount to an abuse of discretion.

Observation:  Be aware of what valuation method is used to determine a present value of a defined benefit retirement plan or a similar benefit.  The difference between the PBGC method and the IRC method can be significant.

How we can help:  We have been calculating the present value of defined benefit plans for over 30 years.  As demonstrated in this case, if our valuations are questioned, we are always willing to back up or valuations in court through expert testimony.

Pension & Expert Smorgasbord

Pension & Expert Smorgasbord

Hine v. Hine, 6th Dist. Wood No. WD-18-023, 2019-Ohio-734 (Decided March 1, 2019).

Issue: How should the court value and divide eight different retirement plans, including a state pension where a potential Social Security offset is involved? And what evidence must an attorney present to the trial court to comply with the guidelines established by the Ohio Supreme Court in Hoyt v. Hoyt (53 Ohio St.3d 177, 1990)?

Introduction:  Hine provides the most thorough airing of retirement valuation and division issues since the Third District ruled in Forman v. Forman (2014-Ohio-3545) five years ago.With some $2.7 million of retirement assets in play in eight plans, the trial produced over 300 pages of transcripts from the dueling pension experts – who, interestingly, were the same experts in the Forman case: David Kelley of QDRO Group and William Napoli, Jr. of American Benefit Evaluators – as well as the experts from two other cases mentioned in the decision.

Decision: After considering the testimony of the dueling experts and the parties’ arguments, Wood County Magistrate Michael E. Hyme drafted a thoughtful 90-page decision (Case No. 2017-DR-0018 Wood County Dec. 12, 2017) . Magistrate Hyme’s opinion was adopted by Judge Alan R. Mayberry. The trial court decision was then appealed by the defendant citing four assignments of error: 

  1. That it was wrong to divide a retirement account in payout status;
  2. That the appellant’s ill health was not factored into the valuation of the pensions;
  3. That the survivorship tail of the pension was not factored in; and
  4. That the wrong standard of care was used.

None of the assignments of error were well taken and the Sixth District affirmed the trial court’s decision. However, the most instructive elements of the case were not those four assignments of error. Instead, the detailed trial court decision on eight major issues (detailed below), the transcripts, the lengthy “Plaintiff’s Findings of Fact and Conclusions of Law,” and the Briefs by the attorneys contained the most meticulous research and argumentation that we have seen in 34 years in the field, including our review of national cases for our legal treatises.

The eight major retirement plan issues raised at the trial court level are listed below. The trial court’s conclusions of law on each issue, which were affirmed by the Sixth District, are listed in italics.

• Is the PBGC market-based present value methodology or the corporate bond method (typically known as the IRS 417(e) method) more appropriate in domestic relations? The trial court chose the PBGC market-based valuation system deciding that “the court cannot confidently consider a compromise” based on a careful review of the testimony, the briefs and at least seven other valuation cases.

• Should survivorship benefits be valued and incorporated into either offsetting assets or the QDRO? The trial court decided it should not. Because a 50% Joint and Survivor annuity is a right that the non-participant spouse would have to waive at retirement, there is no survivorship issue unless the survivorship exceeds the mandated amount.

• How should Hoyt v. Hoyt, 53 Ohio St. 3d 177 (1990) be applied when drafting QDROs? In excluding the present values of survivorship benefits, the trial court decided to continue using the proportionate share (coverture method) as the Ohio Supreme Court spelled out in Hoyt v. Hoyt in which the credited service earned during the marriage is the numerator in the fraction while the credited service at retirement is the denominator. That fraction is then multiplied by a percentage to determine the former spouse’s portion of benefits (the percentage is typically 50% unless there is a government plan from which a Social Security offset is taken or the parties agreed to another percentage).

• What have other DR courts said about pension present values and incorporating survivorship values in drafting orders? The trial court focused its survivorship attention on the Cleveland case of Giuliano v. Giuliano (Cuyahoga C.P. No. DR12 343002 – Magistrate’s Decision Dec. 31, 2013) where the court found that factoring in the survivorship tail was a direct conflict with Hoyt v. Hoyt (53 Ohio St.3d 177, 1990). On the present value issue, the Hine trial court reviewed Forman; Beirele v. Joliot (Franklin C.P. No. 11 DR 1440 – Oct. 10, 2013); Conant v. Conant (9th Dist. Summit, 1994 WL 122193); and Reitano v. Reitano (5th Dist. Fairfield No. 50-CA-1993, 1994 WL 369412), where either the PBGC or the annuity replacement cost was adopted as the preferred method for valuing a pension.

• How have Title VII issues recently entered domestic relations cases especially in light of Arizona Governing Committee for Tax Deferred Annuity and Deferred Compensation Plans v. Norris (463 U.S. 1073 1983)? The Hine trial court found that Giuliano v. Giuliano case was the most factually similar case to the Hine matter and that case (Giuliano) stood “for the proposition that a woman cannot be offered a lesser benefit than a man simply because she is a woman.” The Hine trial court, like the Giuliano court, did not directly rule on the Title VII issue but raised the specter that if the decision did not violate Hoyt, there could still be a Title VII issue to overcome if women were discriminated against as a class.

• What directions does the Actuarial Standards Board’s Actuarial Standard of Practice Number 34, “Actuarial Practice Concerning Retirement Plan Benefit in Domestic Relations Actions,” provide to experts in the field? The Hine trial court did not dwell on this except to note that the standards were broad allowing for the use of a replacement annuity, the use of U.S. Treasury bonds of comparable duration, or a published index reflecting yields for high-quality bonds. Of course, the Treasury bond interest rates would typically yield a present value even higher than the PBGC method which typically is significantly greater than the corporate bonds.

• How should Social Security be factored into the division of a state pension plan? Both experts agreed that the actual, not hypothetical, Social Security of the covered plan participant should be subtracted from the OPERS of the state plan participant to adjust the percentage that would be multiplied by a coverture fraction. However, again the court used the PBGC numbers for the offset.

• What evidence is required for the court to consider a party to have a diminished life expectancy? Here, the court decided – as the Giuliano court did – that because no medical evidence was presented it had no basis to know how to factor in a diminished life expectancy.

Observation: Presenting good evidence at the trial court is essential, especially evidence related to the guidelines established by the Ohio Supreme Court in 1990 in Hoyt v. Hoyt which said that “the trial court must have evidence before it detailing the intricacies and terms of the particular plan.” As winning attorney Carla B. Davis explained in the lead article, “Hine v. Hine: Dueling Experts and a Treasure Trove of Retirement Research,” of the May/June Domestic Relations Journal of Ohio, her goal was straightforward:

“My goal in the case was to present sufficient evidence to the magistrate so that he could understand the method that you [QDRO Group] used and the method that was used by the opposing expert. I also want to show that adopting his method [opposing expert from ABE] would change how we practice domestic relations. It would be contrary to Hoyt in terms of the proportionate share QDROs that we historically use.”

“I relied heavily on Hoyt because it is an equitable division of marital assets case which discussed doing proportionate share [traditional coverture fraction] QDROs so that folks end up with 50% of the marital assets. Our Court of Appeals has often relied in domestic relations cases upon Hoyt in reviewing the trial court decisions to make sure that it’s consistent with Hoyt and with the statute.”How we can help: As you will see from our blog posts, articles, and upcoming revisions to our treatises, we have noticed that there is a major issue brewing related to how the Hoyt guidelines are argued and implemented in domestic relations cases. As such, we are currently working on a package that will provide DR attorneys help with dividing a pension for the entire duration of the case, including the drafting of the QDRO. We will be announcing the particulars of our DB division package shortly.