The Relationship Between the Actuary and Attorney

What is an Actuary?

Methodology – Attorney v. Actuary

The Pension Plan Actuary v. the Dissolution Actuary

Responsibility

  1. What is an Actuary?

    An actuary is one who applies the science of probabilities to define, analyze, and solve contingent financial problems. The function of the actuary is to deal with uncertainty — that is, to reduce to mathematical terms the probability of the occurrence of uncertain events and to evaluate the financial consequences of such events.Catch 22 Generally, the actuary is not licensed to practice law and therefore must rely on the attorney for advice on legal points; however, as an expert, an actuary still needs to develop a comprehensive knowledge of the pertinent case law in order to perform the necessary calculations in a uniform fashion. Standards of conduct for an expert demand a consistent and uniform approach to analysis.

  2. Methodology – Attorney v. Actuary

    1. Attorney

      At the risk of over simplification, an attorney makes a tentative conclusion and then develops the facts to support the conclusion. The approach is to develop the maximum support and justification for the tentative conclusion. If the tentative conclusion cannot be supported, it is modified and the process repeated. The analysis is from the top-down, that is, start at the top (conclusion) and work down (justification).

    2. Actuary

      An actuary seeks the minimum number of facts from which a logical, consistent conclusion can be developed. Actuarial analysis is from the bottom-up, that is, start at the bottom (justification) and work up (conclusion). Generally, an attorney retains an actuary to develop an opinion of a fair value for the community interest in retirement benefits; however, in a particular case, an actuary’s involvement may be limited to doing a mathematical function that is consistent with the attorney’s interpretation of case law. It is important for all concerned to be aware of the function for which the actuary has been retained. The opinion/analysis an actuary develops for an attorney is based on a synthesis of pertinent retirement cases, a number of actuarial and economic assumptions and the information provided about the pension plan and the involved spouses. The actuary’s work product is based on certain fundamental concepts found in court decisions; however, as these cases are not entirely consistent, the actuary must extract the key pension and actuarial concepts from these decisions and apply these concepts to each dissolution assignment. The work product of the actuary/expert tends to be consistent from engagement to engagement, whereas the work product of the attorney/advocate tends to be more client-specific.

  3. The Pension Plan Actuary v. the Dissolution Actuary

    1. The Pension Plan Actuary

      The pension plan actuary’s function is to determine the annual cost of a defined benefit pension plan by using a funding method that spreads the cost of the participants’ retirement benefits over their working lifetimes. The assumptions used must be reasonable in the aggregate; that is, when viewed together, they must produce consistent results from one year to the next. The plan actuary must consider the plan sponsor’s circumstances, the maximum funding restrictions of the Internal Revenue Code, and ERISA minimum funding rules. These are not the same considerations a dissolution actuary has in valuing benefits of a single participant for community property purposes. Pension actuaries are qualified to become dissolution actuaries after they learn the legal bases for dissolution valuations. None of the professional actuarial organizations, however, have been directly concerned with determining the community interest in pension benefits upon dissolution of marriage.

    2. The Dissolution Actuary

      The dissolution actuary’s function is to determine a fair value for a particular individual’s community interest in the pension plan benefits. The actuarial present value approach allows the dissolution actuary to apply actuarial techniques to determine the value, as of a particular date, of the pension benefits in question. Actuarial and economic assumptions reflect the actuary’s best estimate of future conditions as of the date of the valuation.

    3. Involvement of Dissolution Actuaries

      1. As an Expert

        Traditionally the dissolution actuary has been used to develop an opinion of a fair value for the community interest in retirement benefits. A new role is developing for the dissolution actuary in the appraisal of the value of benefits expected from a proposed QDRO. Such analysis is necessary to insure the Alternate Payee receives value equal to one-half of the community interest.

      2. As a Consultant

        1. Alternatives Available

          The dissolution actuary can be used to advise the parties involved on alternatives available concerning disposition of the pension.

        2. Understanding Pension Concepts

          The dissolution actuary can be used to advise the parties involved on alternatives available concerning disposition of the pension.

        3. Legal Resource

          An experienced dissolution actuary has, by experience and discussion with many attorneys, an understanding of the family law cases about pension issues.

        4. QDROs and Division OrdersThe dissolution actuary can be used to assist the attorney in drafting an appropriate QDRO or division order.

  4. Responsibility

  5. Attorney

    1. Actuarial Methodology

      Counsel should understand the methodology used in the actuarial analysis and should be aware of the implications of any caveats present in the analysis.

    2. Discovery and Data

      The actuarial report is based upon data provided to the actuary; generally, this information is accepted and used by the actuary without verification. The actuary is not responsible for discovery.

    3. Interpretation of Law

      The attorney, however, is always responsible for the interpretation of the case law and, of course, will not rely on a dissolution actuary for an interpretation of the law in a particular situation.

    4. Understanding of Actuarial Process

      An understanding of the actuarial appraisal by all parties involved is important, and counsel for both parties are ill-advised to accept any appraisal without questioning the actuary and reviewing the data upon which the appraisal is made.

    5. Expert’s Qualifications

      Furthermore, some persons from other disciplines such as economics, finance, or accounting may have acquired the minimal actuarial skills which, together with knowledge of the legal bases for dissolution valuations, may qualify them to render opinions on the value of the community interest in retirement benefits.

  6. Actuary

    1. Familiar with Family Law

      To provide maximum help to family law attorneys, a dissolution actuary needs to be familiar with that part of family law that deals with pension benefits.

    2. Ability to Explain the Actuarial Process

      A dissolution actuary must be able to explain the methodology used in the development of the actuarial report.

    3. Resource to Attorney

      The actuary’s combined knowledge of pension actuarial matters and family law cases developed by experience and discussion with attorneys is a valuable attorney resource on pension matters.