Superannuation

Friday 14 March 2008

In December 2002, legislative changes involving superannuation were implemented to solve a long-standing problem in family law - namely, how to properly deal with an asset that is ordinarily not available for immediate division.

Together with associated regulations, the provisions of the Family Law Legislation Amendment (Superannuation) Act 2001enable separating married couples and courts exercising jurisdiction under the Family Law Act 1975 (Cth) (the Act) to effect a division of their superannuation entitlements.

A consideration of the effect of these changes should begin with the experience of other jurisdictions. In England and Wales, a similar scheme allowing the division or earmarking of superannuation interests began in December 2001. These "pension sharing" laws were initially forecast to be used in up to 50,000 of the 160,000 anticipated divorces in 2002. In the first six months of operation however, only 367 couples made use of the options to split their superannuation. There are possibly many reasons for the relatively dismal application of the options presented with respect to the division of superannuation entitlements in England. An examination of some of the prominent practical features of the English approach may ensure that the changes in Australia achieve their intended purpose.

Research has shown that women who are poor are less likely to avail themselves of legal advice during the course of separation. There are three basic areas that appear to have presented problems. First, there seems to have been a general reluctance on the part of superannuation fund members and their spouses to use the splitting options. Second, there was (at least initially) a hesitation among practitioners to make use of the new options, whether as a result of their unfamiliarity with the provisions or their uncertainty about implementing them. Third, there was a heavy workload associated with effecting any split, reflected in the administrative burden placed on trustees and supervisors of retirement savings accounts to facilitate the changes.

The legislative changes were introduced as the solution to a long-standing problem in family law - how to properly deal with an asset that is ordinarily not available for immediate division and is beyond the effective control of the parties. This issue takes on added significance when you consider that superannuation is now said to constitute at least 25 per cent of the asset wealth of the average Australian family. With an ageing population, tighter government policy and superannuation guarantee legislation, it is likely that this proportion will increase significantly over time.

Before the changes it was necessary to offset the superannuation entitlement of one party by providing the other with a larger share of the asset pool. This potentially left one party with insufficient capital to re-establish him or herself in the short term. But will the ability to divide such a major component of the average "asset pool" necessarily overcome this problem?

It would be straightforward enough if separating spouses each had an individual superannuation entitlement of an equal or equivalent amount. There is, however, a real and continuing discrepancy between the number of men and women who have interests in superannuation funds. Not only do fewer women have superannuation, but the median value of the superannuation held by women is considerably less than that of men. It is also inversely proportionate to the number of children a woman may have. Where separating couples have low overall asset wealth, superannuation tends to be, in relative terms, a larger component of the overall asset pool. As a result, those who would ordinarily benefit the most (at least statistically) from the option to split superannuation are women with limited means who have children.

Research has shown that women who are poor are less likely to avail themselves of legal advice during the course of separation. Unfortunately, therefore, those who would be best suited to make the most from the splitting of superannuation (spouses without their own superannuation interests and in a low-wealth family) are likely to be the very people who do not make use of the new options.

In the explanatory memorandum to the legislative changes which was circulated in 2000, the federal Attorney-General indicated that "the lack of flexibility in dealing with superannuation means that current property must often be traded away in exchange for an asset that may not be able to be realised for many years. This leaves one party with the realised asset of the house, yet with no retirement income and the other party with no realisable assets but often significant retirement income". Interestingly, the prospect of the latter spouse in the above example insisting on the division of their superannuation interest may create a different (and perhaps more challenging) problem. The manager of a large retirement savings group recently indicated that the division of superannuation between separating spouses, made in the context of a division of their capital, "could leave both parties with insufficient accessible proceeds to buy a new home".

For example, assume that a separating couple has a jointly owned unencumbered home valued at $200,000 and that the husband has a superannuation entitlement of an equivalent amount. In circumstances where the parties wish to divide their assets equally, the difficulty has been that the husband would necessarily keep his superannuation and so be left with a resource to which he has no immediate access. The wife, while keeping all the available capital, would be similarly disadvantaged in that she would be left with no future financial security.

If the husband was to insist on the division of his superannuation entitlement so as to gain immediate access to some capital, it may be unavoidable that the home be sold with no guarantee that either party would then be able to purchase elsewhere. The ability to divide the superannuation entitlement on a proportionate basis will alleviate this problem, but in such cases will not provide a real solution to the immediate difficulties faced by the spouse left with little capital and a relatively large amount of superannuation.

It is, of course, the case that administrative considerations are relevant to the ease with which the options can be used. The amendments themselves will have a significant impact on the operations of trustees of superannuation funds as they present many varied administrative and compliance issues.

For example, on receiving a request in the appropriate form, a trustee is required to provide information to a member's spouse regarding the member's entitlement.. They are prevented, under risk of personal penalty, from revealing the address of the member to the spouse, just as they are prevented from informing the member that a request for information has been made. Trustees are obviously required to effect the terms of an order or agreement regarding the splitting or flagging of a superannuation interest and thereafter provide ongoing information to the members. While trustees and administrators of funds are entitled to charge "reasonable" fees for these administrative tasks,\

Another potential problem for trustees and managers under the new scheme lies in the introduction of superannuation agreements. These agreements are analogous in form and operation to the binding financial agreements currently provided for in the Act.They provide a means by which separating couples can formalise an agreement with respect to the division of superannuation without the need to involve the courts. While the agreements need to comply with certain requirements and be certified by each party's independent practitioner, they are otherwise limited in only three basic respects:

1. they must identify the superannuation interest which is the subject of the agreement;

2. the agreement must be in force at the operative time (as defined in the legislation); and

3. the relevant superannuation interest must not be an interest with a withdrawal value of  less than $5000 (referred to as an "unsplittable interest"). As superannuation agreements are not, by definition, ratified by a court or necessarily administered by any other authoritative body, it is likely that the terms, content and wording of each agreement will vary. Parties to the agreement (unlike the court15) will be able to specify the method by which the superannuation interest will be split and are not otherwise required to obtain a valuation of the interest to be split. This may give rise to particular problems. For example:

4. The provisions of the legislation override any inconsistent state and commonwealth laws and are paramount to anything contained in a trust deed or other prevailing

5. Superannuation agreements can be made before marriage, although they will only take effect on marriage and after separation. It does not matter whether or not the superannuation interests are in existence at the time the agreement is made.It is presumably possible therefore for one spouse to provide an individual separation declaration to a trustee, together with a superannuation agreement that makes no specific reference to the interest to be split. Trustees will no doubt incur an additional workload as a result.