The Family Law Act gives a court power to split superannuation. This power has been available since 2002. The power to split superannuation operates whether the superannuation is still being accumulated or whether it is being paid as a pension.
Invalidity pensions raise a number of unique problems for the supersplitting law.
What if a person is receiving a pension but the pension is being paid because of invalidity?
First, the invalidity pension is often paid well before retirement. So while the supersplitting law applies to retirement income, the law also applies to invalidity pensions being paid for members who have not reached retirement age but cannot work because of the invalidity as these pensions are paid through the superannuation scheme.
Second, the pension is usually calculated on the basis that the member would have stayed in employment until retirement age. For example, assume the member was aged 40 and had a pension entitlement at that age of 20% of salary. If the member is invalided out, the pension entitlement can increase the pension to as much as 70% of salary, depending on the rules of the particular superannuation scheme.
Third, the invalidity pension is paid while the member meets the invalidity requirements and cannot work. The invalidity pension continues even after retirement age has been reached. In other words, it can be a life pension.
Fourth, if the member is medically reviewed, the member may be required to return to work.In that case the pension ceases.
Fifth, some pensions allow the member to undertake other work and the pension is not affected. So there is no income test on the pension and some members can receive the invalidity pension and income from other work.
So what happens under the supersplitting law in the Family Law Act when the court makes an order to split the invalidity pension?
Under the supersplitting law, the pension is treated as superannuation. The court can split the invalidity pension. Depending on the rules of the scheme, the court order might result in two new pensions (but the amount won’t exceed the single pension). Or the court order might result in a lump sum payment to the former spouse and a reduced pension to the member.
Is this fair?
The problem is that the result has to be fair to both sides. A court order to split the pension can result in unfairness to a member who cannot work and the pension is immediately reduced. But it can also result in unfairness to the former spouse because the retirement income is locked up in the pension and the spouse may have little or no superannuation. That person may have care of young children.
This needs to be reformed.
What needs to happen is that split of these invalidity pensions should take account of the unusual characteristics outlined above. For example, the court order might be made so that it only operates at retirement. But the court order might also need to take account of support for the former spouse and perhaps care of young children through a temporary order.
The reforms should also take account of the need to have a final financial settlement as well as the situation in the event of early death of the member. Different retirement ages is a further consideration.
Until this are of the law is reformed, it will be unfair to both the member and the former spouse.
Stephen Bourke, Director, Farrar Gesini Dunn.