The German constitutional court, Bundesverfassungsgericht, has ruled that losses caused by the transfer of company pension benefits after a divorce through so-called “external divisions” can be unconstitutional.
In the ruling, the court stressed the necessity to safeguard the basic rights of all persons involved in the division of pension benefits based on section 17 of the Pension Equalization Act – or Versorgungsausgleichsgesetz.
Section 17 regulates special cases of external division of company pensions.
In these cases, the value of pension compensation from a direct promise or a support fund (Unterstutzungskassse) should not exceed the contribution ceiling in the pension scheme.
External divisions following a divorce may take place also without the consent of the person entitled to compensation, and the person entitled to compensation is granted a claim before a pension provider different from the one of the person liable for compensation.
Transfer losses are associated with disparities in the level of interest rates based on historical trends, according to the ruling.
“The court points out that the interest rate may differ between the two pension schemes, and by transferring the entitlement to an external pension vehicle, the change of the interest rates can lead to so-called transfer losses, which generally disadvantage women,” Klaus Stiefermann, managing director at aba, the German occupational pensions association, told IPE.
The family court, according to the Bundesverfassungsgericht, ensures that the external division does not unduly reduce the pension benefits, he said.
“Family courts now have a task that is certainly not easy to accomplish,” he added.
In the ruling, the constitutional court clarified that section 17 of the Law on Pension Equalization is compatible with the Basic Law, or Grundgesetz.
Stiefermann added: “This is good news. The ruling has basically declared the law on the division of company pension entitlements in the context of divorce proceedings to be constitutional.”
For Michael Ries, managing partner at Ries Corporate Solutions, the decision of the constitutional court is good at first glance, but “it will inevitably lead to the fact that external divisions, in particular for old cases, will not be possible, and the divided claims remain in the company.”
Ries added: “In the extreme situation, you may have more former partners or wives in a company than active employees. A person may have different former wives, so you have different partners for one former employee […] and the insurer is unable to divide the products.”
External divisions can start if the person entitled to pension compensation and the pension provider of the person liable to compensation agree on it, or if the pension provider of the latter person requires an external division.
“This “external splitting” is an alternative to the so-called “internal splitting”, in which the divorced spouse, who has not worked for the company, must be included in the company’s pension system as an external person, a process that involves a considerable administrative effort,” said Stiefermann.
After the divorce, companies can choose whether to manage only the occupational pension scheme of the employee or also that of the partner, or transfer part of it to another pension scheme.
“The possibility of having a choice between these options is positive. This is exactly what we were advocating in the reform at the time,” Stiefermann said.