Pension Equalisation: Fair Division of Pension Entitlements after a Divorce

In principle, a divorce affects all areas of the couple’s life. Consequently, all assets, property, and entitlements must also be divided fairly. In Germany, the equalisation of pension rights divides up pension entitlements acquired through contributions to various pension schemes during working life. This often involves statutory and private pension insurance and company pension schemes.

In a marriage, these entitlements are usually acquired jointly, even if they are formally credited to the pension account of only one spouse, as the marriage is regarded as an economic community in Germany. The joint entitlements are then inevitably divided upon divorce. The division of entitlements is based on the assumption that both spouses contribute to the economic community in different ways. While one partner acquires pension entitlements through direct gainful employment, the other partner may run the household or look after the children. Such a division of labour allows the working partner to concentrate on their career, ultimately benefiting both. Pension equalisation aims to ensure that both partners benefit equally from the pension entitlements and receive an adequate pension in old age.

The German Pension Equalisation Act (VersAusglG) was created in 2009 to regulate pension equalisation as part of the reform of marriage law in Germany. The reform aimed to bring about greater fairness in the division of pension rights and to make the equalisation of pension rights more comprehensible for those affected. In principle, the competent family court calculates the pension entitlements of both spouses acquired during the marriage and then divides them equally. The spouse who has acquired fewer pension entitlements during the marriage receives equalisation entitlements to ensure a fair pension entitlement.

Equalisation is achieved by transferring pension entitlements directly to the pension accounts of the respective spouses. According to the German Federal Constitutional Court, this equalisation is intended to benefit women in particular, who are still often unable to acquire corresponding, not merely minor, independent pension entitlements themselves during the marriage due to childcare periods (para. 2, case no. 1 BvL 5/18).

In principle, pension equalisation and the division of pension entitlements must be carried out internally in Germany (see Section 9 (2) VersAusglG). Internal division means that the pension entitlements are divided directly within the pension scheme in which they arose. This means that the spouse who has acquired fewer or no pension entitlements of their own receives their own pension entitlements in the same pension scheme due to the internal division. In addition to the division, it should be noted that the pension provider calculates costs for the division, which, as far as appropriate, are offset equally against the entitlements of both spouses so that the pension is ultimately reduced as a result, see Section 13 VersAusglG.

An external division exists if the pension entitlements are not divided within the same pension scheme, but the spouse entitled to equalisation has their entitlements transferred to another pension scheme, see Section 14 VersAusglG. Such a transfer is subordinate and only to be carried out in cases provided for by law. According to Section 14 (2) VersAusglG, an external division must be carried out if the person entitled to equalisation and the pension provider of the person subject to equalisation agree on an external division or if the pension provider of the person subject to equalisation requests an external division and the equalisation value at the end of the marriage does not exceed a fixed reference value.

If the German Company Pensions Act applies to the entitlement to be equalised, the person entitled to equalisation acquires the status of a retired employee within the meaning of the Act with the transfer of the entitlement, Section 12 VersAusglG.

Company Pension Equalisation using an Example Case

The requirements for pension equalisation in the form of external division are often structured as follows in practice:

The example is based on the ‘classic family model’ and the situation predominantly found in practice, where the husband earns a living, and the wife takes on the household and child-rearing tasks. During this time, the husband can pay high contributions into the company pension scheme, which is not possible for the wife in this form. If the marriage then ends in divorce, these pension entitlements must be divided by means of pension equalisation, whereby in certain legally standardised cases, the husband’s insurance provider or employer can demand external division. The wife must then invest her share of the pension with a different institution than the husband.

The result of such an example case is that the external pension provider must reckon with different, lower interest values, so the wife makes losses. This means that only half of the husband’s shared pension entitlements after the divorce may end up with the wife. Therefore, external division in this constellation is particularly burdensome for the spouses who are entitled to equalisation.

External division results in high transfer losses due to a complicated method of calculating the current capital value of the pension share to be divided in pension equalisation. As a result, the expected pension benefits fall short of both what the spouse who is obliged to equalise has to give as a result of the division and what the spouse entitled to equalisation could have expected from the pension provider of the spouse obliged to equalise in the case of internal division.

In addition, the development of interest rates in recent years has led to high-interest rate differences between the pension providers, meaning that the pension contributions are not distributed fairly as a result. For this reason, a careful examination of the court calculations must always be carried out in the context of pension equalisation, especially when dividing pension entitlements, to ensure the fairest possible division.