Defined benefit superannuation interests in the pension phase in family law
By Christopher Ragozzino, Senior Associate
Handling defined benefit superannuation interests in family law matters is one of the more complex aspects of property settlements heard in the Federal Circuit and Family Court of Australia. Unlike accumulation funds, defined benefit interests often involve unique characteristics that require careful consideration.
While defined benefit interests still exist, they are less common than accumulation funds and are often closed to new members. Given their prevalence in many public service roles in the past, such as police officers, defence force and teachers, these types of interests continue to be considered by the Court in property settlement proceedings when people separate.
Defined benefit interests
A defined benefit superannuation interest is a type of super fund where the retirement benefit is calculated based on a formula. This typically involves factors such as years of service, final average salary, and a fixed accrual rate, rather than the amount of contributions and investment returns. This structure provides a predictable income stream in retirement, often as a pension, and can include options for commutation to a lump sum at a certain age.
Unlike accumulation funds, defined benefit interests are not tied to a visible account balance. Their value is contingent on future entitlements, making them complex to assess. To understand their value, a Form 6 Declaration is required and, once that is received, a superannuation valuation expert engaged by the parties. This process results in what is called the Family Law Valuation (“FLV”).
Key challenges
Once the FLV is obtained, further issues need to be grappled with. Some examples include:
- The FLV can sometimes appear artificial. For example, a pension valued at $890,000 today for family law purposes might only produce a lump sum of $400,000 if commuted at age 60 or 65, many years down the track;
- If a pension split is ordered, and the member of the fund is in receipt of a pension, the split may result in a reduction in the member’s pension they receive, which may have implications for the current and future circumstances of the parties (and thus the overall settlement); ;
- If the pension split is ordered and the member later commutes the pension, they could end up with little or nothing due to the creation of a debt account for the non-member spouse;
- In some cases, such as where the member receives workers’ compensation in addition to their pension, adjustments may occur to offset reductions in pension income following a split.
The Court’s emphasis is on the nature, form and characteristics of the fund in question. While some interests may be able to be commuted, others may not. Some may be subject to income and health reviews, others may not. The FLV is only one part of the equation, but it can cause confusion. It all depends on the nature, form and characteristic of the fund and the member in question.
It is critical that in addition to legal advice, the member who is subject to a prospective pension split obtains financial advice so that they can properly understand the implications of any split.
Why expert advice matters
Defined benefit superannuation interests require specialist advice and often expert valuation. Early engagement with experienced family lawyers and financial experts is essential to avoid unintended consequences and ensure appropriate outcomes.
Kennedy Partners has extensive experience in matters involving defined benefit superannuation interests. If you need advice on how these interests may affect your property settlement, contact us on 03 9618 7300.