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 per 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 marriage law reform. The reform aimed to create 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 the 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 is 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 exceptional provisions that 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 household tasks and brings 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 divided by the pension rights equalisation scheme. In certain legally standardised cases, the husband’s insurance carrier or employer can demand the external division. The wife must then invest her share of the pension with a different institution than the husband.
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 wife makes losses. So what the husband gives away in shared pension entitlements after the divorce is only half of what the wife 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 Rechtsanwälte. Our family law team provides advice on 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.