There are two types of multi-member superannuation schemes – the first type are accumulation schemes and the second type are defined benefit schemes.
Most members of superannuation schemes contributed to by their employers are members of accumulation schemes. These schemes pay a lump sum upon the conditions of release being met. The value of a member’s entitlement is shown on the member benefit statements which are usually sent out twice each year. The value is the total of the employer’s contributions over the duration of the employee’s benefit together with investment earnings from the scheme trustee investing the funds held by the scheme.
Defined benefit superannuation schemes usually disburse their benefit by way of a pension. The pension is calculated by applying a formula to the contributions to the scheme and the employee’s wage that was being paid immediately before the condition of release is met. Some examples of these schemes include Military Super, older State Super memberships and Public Sector Superannuation.
When a marriage or de facto relationship brakes down, under the Family Law Act 1975 (“the Act”), superannuation interests can be split between the parties to the marriage or de facto relationship. Both interests in accumulation fund schemes and defined benefit schemes can be split. The first step to be taken when a superannuation split is being pursued is to calculate the value of the particular member’s benefit. For an accumulation fund scheme, the value at any given date will be shown in a Superannuation Information sheet, which can be obtained on application to the trustee of the scheme. For a defined benefit scheme, a Superannuation Information statement must be obtained first and then a valuation of the member’s entitlement must be carried out by a qualified expert.
Defined benefit schemes provide an advantage, as the former member obtains a guaranteed flow of income throughout retirement. The non-member spouse or partner will not have the benefit of this advantage unless they too were a member of a defined benefit scheme. They will be limited to having the amount of superannuation that was built up during their membership of an accumulation scheme, or if they were not a member of any superannuation fund, they may well be dependent on a government pension. The existence of an interest in a defined benefit scheme will therefore be a very important factor for consideration in any property settlement negotiations or litigation.
The splitting of a defined benefit superannuation entitlement can be a complex process, in which a number of factors need to be taken into account. These factors include:
- The value of the member’s interest in the superannuation scheme;
- The future benefits that the member is entitled to, such as a pension and whether the pension can ever be commuted to a lump sum;
- Whether the split can be affected immediately, or whether there is some waiting period involved;
- The tax consequences of effecting a split.
If the defined benefit can only be taken as a pension, then although the value of the benefit can be calculated pursuant to the regulations, it must always be remembered that the holder of the benefit will never be entitled to receive the benefit as a lump sum, but will only be able to receive it as a pension – Semperton [2012] FamCAFC 132.
The Act provides two methods for splitting an entitlement in a defined benefit superannuation scheme:
- A base amount split – this method involves the splitting of the base amount of the member’s interest in the scheme. Once the base amount is split, the pension that will be payable on each of the two parts created can then be calculated.
- A percentage payment split – this method involves splitting the member’s future benefits into two separate percentage amounts.
Once the method of the superannuation split and the amount of the split has been agreed, approval for the split must be obtained from the trustee of the superannuation fund. If the member’s superannuation entitlement is in the growth phase, which is when contributions are still being paid into the fund, a new entitlement in the fund will be created in the name of the non-member spouse. That entitlement can be rolled over into another fund upon request.
If the member’s superannuation entitlement is in the payment phase, upon the split the member’s pension entitlement will be reduced and, depending on the fund, the non-member can elect to take their entitlement that has been created by the split as either a pension or a lump sum. It is important to note that the non-member spouse cannot withdraw their split amount unless they also meet the conditions for release.
Some defined benefit schemes, once they are in the payment phase as a pension, cannot ever be commuted to a lump sum. There is authority that in those circumstances, attaching a lump sum value to the future pension entitlements is a false exercise, and the ongoing pension entitlement can only be taken into account as a guaranteed income stream – Preston & Preston [2022] FedCFamC1A 157. In that case, the husband’s entitlement to the ongoing military pension, that could not be split, meant that the property settlement division that the wife would otherwise have received was increased as a consideration under ss79(4)(d)-(g) and 75(2).
The splitting of an entitlement in a defined benefit superannuation scheme can have a significant impact on the member’s retirement income. There may also be taxation consequences for both the scheme member and the non-member spouse. It is important to seek legal advice to ensure that the splitting process is done correctly and that each of the member spouse and the non-member spouse end up with a fair share of the benefits. It may also be helpful to seek advice from an accountant or financial planner to see what option is best for the particular individual.
The splitting of an entitlement in a defined benefit superannuation scheme can be a complex process, but it is an important part of effecting a property settlement where such an entitlement is in existence. By understanding the options available and seeking legal advice, you can ensure that the split is fair and that your interests are protected.
Written by
Stephen Rugendyke
Special Counsel
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