Divorced spouses whose main activities in the marriage were household and child-rearing may in future demand an equitable distribution of pension rights claims from the occupational pension of the working spouse. Despite the fact that familial roles have progressed to a state beyond merely the traditional family model, it is still mainly women who are affected by unfair pension provision in the event of divorce.

The Federal Constitutional Court decided on 23 May 2020 (Case No. 1 BvL 5/18) that family courts are required to compensate for the systematic disadvantage in the distribution of claims in divorce proceedings. In future, this is intended to prevent the previous pension losses of several hundred euros per month. Overall, according to the stipulations in the ruling of the Federal Constitutional Court, a difference in pension distribution of a maximum of 10% may remain.

This article shows you how the Federal Constitutional Court’s ruling came about and what results from it for the controversial § 17 of the Act on Pension Equalisation (VersAusglG). Furthermore, we draw your attention to the consequences of the ruling which must now be observed and finally give you some practical advice. If you are personally involved in divorce proceedings, are considering divorce or need further information on your individual legal situation, our qualified family law attorneys from Schlun und Elseven will be happy to assist you with all their experience and expertise.

Initial Situation relating to Pension Rights

Divorce basically affects all areas of the (former-) spouses’ life together. All assets, objects and entitlements must be divided. Pension rights’ claims are also generally offset against each other in accordance with the so-called pension equalisation scheme. This is intended to ensure a fair settlement of pension claims between both spouses in the event of a divorce. This is because the main earning spouse would otherwise receive much more in their pension by paying into the company pension scheme than the spouse who has simultaneously taken over the upbringing of children and maintenance of the household, which in practice is still predominantly women.

In the settlement of occupational pensions, the spouse entitled to settlement – unlike other pension rights’ claims – does not necessarily receive pension claims against the same pension provider of the ex-spouse. Overall, a distinction is made between two principles of division, internal and external division. Both are regulated in the Pension Equalization Act.

Pension Equalization Act: Internal and External Division

To regulate this pension rights’ equalisation, the Act on Pension Equalisation (VersAusglG) was created in 2009 as part of the reform of marriage law. The aim of the reform was to create a fairer participation in the pension assets acquired during the marriage by prescribing a fundamental internal system division, i.e. with the pension provider of the spouse who is subject to equalisation (occupational pension of the working spouse). According to the Federal Constitutional Court, “(…) above all women should benefit from this “(…), who are still frequently not in a position themselves to acquire corresponding, not only marginal, independent pension entitlements during marriage, often due to childcare periods. (margin no. 2, ref. 1 BvL 5/18).

The internal division does not take the form of offsetting against other claims or a financial payment to the spouse entitled to equalisation in the event of divorce. Rather, the spouse entitled to equalisation is in principle to receive his or her own pension claims under the pension scheme of the spouse who is obliged to equalise. An external division exists if the company pension entitlements of the spouses entitled to equalization are not taken over by the pension system of the spouse who is liable to equalization, but are outsourced.

Thus, the ex-spouse does not have a split pension entitlement with the employer of the original spouse, but only with an external pension provider. § 9(2) of the VersAusglG basically assigns priority to internal splitting over external splitting. However, the Act also provides for exceptional provisions which expressly permit external splitting, as in §§ 14 and 17 VersAuglG.

Summary using the Example Case

The initial situation for the decision of the Federal Constitutional Court is to be summarized by a short example. In practice, the requirements for pension rights equalization in the form of external splitting are often structured as follows:

The starting point for the example is the “classic family model” and the situation that is predominantly found in practice, in which the husband earns a living and the wife takes over the tasks of the household and bringing up the children. During this time the husband can pay high contributions to the company pension scheme, which is not possible for the wife in this form. If the marriage then comes to a divorce, these pension entitlements are to be divided by the pension rights equalisation scheme, whereby in certain legally standardised cases the husband’s insurance carrier or employer can demand the external division. The woman must then invest her share of the pension with a different institution than the man.

Result: Transfer Losses and Interest Rate Differences

The result of such an example case is that the external provider has to reckon with other, worse interest rates, so that the woman makes losses. So what the man gives away in shared pension entitlements after the divorce is only half of what the woman receives.

This means that external splitting in this constellation is particularly burdensome and shocking for the spouses affected who are entitled to equalisation. On the one hand, external splitting causes high transfer losses, which result from a complicated method of calculating the current capital value of the pension portion to be split in pension equalization.

As a result, the expected pension benefits fall short of both what the spouse who is subject to the equalization due to the division and what the spouse who is entitled to equalization could have expected from the pension provider of the spouse who is subject to equalization in the event of internal division. Moreover, the development of interest rates in recent years has led to high interest rate differences between the pension providers, so that pension contributions are not distributed fairly.

Family Law Advice and Representation

If you find yourself in a situation where you need legal advice on family law issues in Germany, make sure to contact Schlun & Elseven Attorneys. Our family law team is led by a certified specialist in family law Kerstin Wolters and provide advice in a wide range of family law issues. We advise clients from all over the world from our offices in Aachen, Cologne and Düsseldorf in English and German. If you would like more specialised assistance in the field of pension rights, please contact us directly. Our lawyers are looking forward to working with you.

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