Divorce hurts – pension equalization from August 1, 2021

The Pension Equalization Act (VersAusglG) governs the handling of pension obligations in the context of pension equalization. Following a fundamental reform of the pension equalization system in 2009, the Act Amending the Pension Equalization System (Gesetz zur Änderung des Versorgungsausgleichs) came into force on August 1, 2021. In particular, the new requirements again significantly restrict the conditions for the external division of pension entitlements. If the person subject to equalization is already receiving a pension, the person entitled to equalization shall also have the right to choose the equalization procedure in order to bring about either the current mechanism or the pension equalization that was still in effect before 2009, according to individual advantages. To this end, new duties to provide information on the part of the pension provider are introduced. In this respect, the innovations entail further administrative work and thus higher costs for the occupational pension system, which was supposed to become one thing: simpler. We briefly summarize the most important changes for your company.

I. Legal situation until 2009

According to the provisions in force until 2009, the pension equalization of occupational pension rights was generally to be carried out in the so-called pension equalization under the law of obligations, i.e. not already at the time of divorce, but only after both spouses had entered the benefit entitlement phase. The equalization mechanism contained the requirement that after the death of the person liable for equalization, the pension provider had to make the payment to the person entitled to equalization himself/herself if he/she would have received a widower(er)’s pension without divorce.

The statutory law in force until 2009 entailed significantly lower implementation costs for pension providers. The actual burden on pension funds was also reduced, not least because persons entitled to equalization often did not assert their equalization claims. This finding in particular prompted the legislature to introduce the new VersAusglG. In principle, the cases that were legally decided before 2009 must continue to be settled under the law of obligations. Even today, the law still provides for constellations of rights that are not ready for equalization, which are not to be equalized in connection with the divorce by internal or external division, but only later under the law of obligations. Since 1.8.2021, the law now even contains another such constellation.

II. paradigm shift since 2009

The statutory law in force since 2009 stipulates that the pension equalization is already implemented and executed together with the divorce. Company pension providers (in the case of a direct commitment, the employer is the pension provider; in the case of the external implementation paths, the external pension provider, e.g. in the case of a direct insurance policy, the life insurance company) may choose whether to carry out the halving of the pension pro rata temporis at the benefit level or at the capital value level. Due to the possibility of splitting at the capital value level, there is a fundamental orientation towards structural load neutrality. At the same time, the VersAusglG entailed a high administrative burden. In particular, the information to be provided by the pension provider – free of charge – is very time-consuming to prepare and generally requires the assistance of an actuary.

Above all, however, entitlements have since had to be administered over decades in the event of internal division: The beneficiary is to be treated in the same way as an employee who has left the company with vested rights. The employer is allowed to estimate division costs. Although these costs are generally apportionable (a flat rate of EUR 500 per entitlement or more if substantiated), they do not cover costs, particularly in the case of direct commitments.

III Amendment Act 2021 – far from the idea of “pay and forget”.

(1) Aggregation of entitlements to be divided externally for limit value

In principle, the division of entitlements is to be carried out internally. External division, in which the pension provider pays the equalization amount to an external pension provider, is to be the exception: Section 14 para. 2 No. 2 VersAusglG stipulates that the pension provider may unilaterally demand external division if the capital value of the half marriage entitlement does not exceed a maximum value (2021: 65.80 euros pension or 7,896 euros capital). In the case of direct commitments and provident funds, the following provisions apply pursuant to Sec. 17 VersAusglG in conjunction with Sec. 17 VersAusglG. 159, 160 SGB VI (German Social Code, Book VI), which was initially controversial, as it was feared that those entitled to compensation would receive pension benefits that were too low as a result. The provision was approved as being in conformity with the constitution, provided that the equalization value is increased if the pension of the target pension provider falls short of the pension under fictitious internal division by more than 10%.

In principle, each entitlement is to be divided separately. According to case law, a commitment financed in part by the employer and in part by the employee (deferred compensation) comprises two separate entitlements. Similarly, different commitments existing with one pension provider with different plan formulas are considered to be different entitlements.

Until now, each of these entitlements had to be measured separately against the respective threshold. The new provision now stipulates that if several entitlements within the meaning of the German Occupational Pensions Act are to be settled with one pension provider, the individual settlement values are to be added together. Only pension funds with pension entitlements that do not exceed the value limit even when several entitlements are added together are not restricted in the external division. This means that action is required in the case of external splitting if the pension commitments are divided into various separate entitlements to the extent that they exceed the relevant threshold in total.

It is important to note that the new legal situation not only applies to new information provided after the amendment to the law came into force, but also to all pension equalization processes that have not yet been legally concluded. Therefore, as of August 1, 2021, there will also be a need for adjustments in processes that have already been reported.

(2) Option for compensation under the law of obligations for current pension payments

If the person subject to equalization already draws a current pension, there are various difficulties in implementing the pension equalization. If an entitlement for which the settlement value is determined on a net present value basis is already in the benefit phase, the actuarial present value of the pension is often lower when the family court decision becomes final than it was at the end of the marriage or when the benefit phase commenced. This results from the decreasing number of pensions still outstanding over time. According to case law, the settlement in these cases is generally made on the basis of the remaining (residual) present value as the settlement value close to the time of the decision on the pension rights adjustment. The resulting benefit for the person entitled to equalization may then be significantly lower than was to be expected at the end of the marriage period.

In this case, the person entitled to equalization now has the choice in future to exclude the entitlement from the value equalization upon divorce and to reserve it for the equalization claims under the law of obligations after divorce (Sections 20 et seq. VersAusglG). As of August 1, 2021, pension providers must – if the equalization value changes – additionally prepare information free of charge according to the division method that existed before 2009. The person entitled to compensation may choose the method of division that seems more advantageous to him/her individually. There is no option if the pension provider proposes to split the benefits (i.e. the payment amounts) in half instead of the capital values.

Pursuant to Section 30 of the VersAusglG, the pension provider may continue to make full payments to the person liable for equalization with discharging effect until the end of the month following the month in which it becomes aware of the legal validity of the court decision. The exemption effect is now limited and only applies to the extent of payments actually made.

IV. Conclusion

We recommend that you take the legal amendment as an opportunity to review your division regulations for design options and current need for adaptation. In our opinion, a fundamental departure from any external division while changing your own division concept in order to achieve a uniform handling in the direction of internal division is an inappropriate reaction and detrimental to your company. It would appear preferable to have a regulation which, taking into account the new requirements, examines the specific individual case and further proposes external divisions where these are permissible. We will also be happy to support you with regard to the specific calculations and other questions in the context of the implementation of pension equalization proceedings.