Divorce and Risky Pensions

A retirement plan is often the largest single asset available for division in a divorce. What do you do when that asset is a pension, and there’s some question about whether the company paying it will follow through? Here’s a story about the challenge from the Dallas Morning News, running this morning in The South Carolina State.

Until recently, parties negotiating the terms of a divorce were entitled to assume — and did assume — that if one of the parties was due to receive a pension, payment of that pension would be reliable and consistent. Now, with record numbers of companies dumping their pension obligations on the federal government and walking away from them, there’s a new uncertainty about pension payout that permeates divorce negotiations.

When the Pension Benefit Guaranty Corporation (PBGC) takes over a pension, it will pay some but usually not all the pension obligation to each participant. The result is that the company walks away clean, the taxpayers foot the bill, and the individual pension recipients get the shaft.

When a couple is at war in a divorce, each spouse engages in an all-out war to dump the doubtful pension on the other spouse AND to persuade the court to charge that spouse with its full value. In my world of cooperative divorce, couples have several choices:

  • They can give the pension to the party most able to deal with its uncertain payout, typically the spouse who is more capable of producing more income from other sources if necessary.
  • They can agree on some discount to assign to the pension’s value in their negotiations.
  • They can agree to share the pension in roughly equal proportion, thus sharing the risk of nonpayment equally.
  • Splitting the value of a pension requires use of Qualified Domestic Relations Order (QDRO). There’s some transaction cost associated with a QDRO, and that transaction cost will be greater for a pension than for a defined contribution plan like a 401(k). But when pension payout is uncertain, sharing the risk with a QDRO may be the the most acceptable solution for both spouses.

    2 thoughts on “Divorce and Risky Pensions”

    1. I recently got divorced, i have a pension, my ex gets acheck, but not as much as mine.he got re-married.is he entitled to any of my pension?

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