Understanding Family Law Defined Benefit Interests

Understanding how to value a defined benefit superannuation interest is one of the most complex aspects of the Family Law (Superannuation) Regulations 2001.

Defined benefit superannuation schemes differ significantly from accumulation funds. The valuation in family law matters must consider the unique structure of these entitlements. Most commonly, the value is determined using a formula that incorporates the following general principle:

Fund Multiple × Years of Service × Current Salary × Present Value Discount (Fy+m)

This is often seen in formulas like:

ABM × Salary × Fy+m

Where:

• ABM (Accrued Benefit Multiple) = Fund multiple × Years of service

• Salary = Superannuation salary at the valuation date

• Fy+m = Present value discount factor based on years to retirement

Why the Family Law Value Increases Over Time

The Family Law value of a defined benefit interest typically increases over time due to three core factors:

1. Accrued Benefit Multiple (ABM)

As years of service increase, the ABM grows proportionally, or even more than proportionally in some schemes where higher service terms are rewarded at a greater rate.

2. Salary

Current salary is used in the valuation, not a projected retirement salary. However, promotions and inflation mean most people earn significantly more closer to retirement. Since the benefit is based on final salary, this creates a compounding effect on the total valuation.

3. Present Value Discount (Fy+m)

The Fy+m factor represents the discounting of the value of a future benefit. At age 65, the factor is 1 (no discount). At younger ages, this factor is significantly lower:

Age	Fy+m Factor
30	0.4301
40	0.5612
50	0.7204
65	1.0000

As the member approaches retirement, the discount decreases, which increases the present value of the benefit.

Scheme-Specific Adjustments

Some superannuation funds have applied for Scheme-Specific Factors approved under the Family Law regulations. While these use the same basic structure, they often modify:

• The ABM calculation (to reflect fund-specific benefit rules)

• The Fy+m factors (to account for different discount rates and updated mortality assumptions)

Estimating Value at Date of Cohabitation

We are frequently asked to calculate the value of a defined benefit interest at the start of a relationship, often decades before separation, to assist in assessing initial contributions.

However, the value at this earlier time is usually much lower than expected, due to:

Low Early-Career Earnings

Most defined benefit members are just starting their careers at the time of cohabitation. Salaries are modest and below occupational averages:

• 1983: Average earnings were $18,824

• 1993: Average earnings were $31,850

• Today: Average earnings exceed $57,000

Professionals often don’t exceed the average earnings for their field until their 40s.

Low Accrued Benefit Multiple

The number of years served at cohabitation is much less than at separation. Many schemes apply a flat accrual rate, but some offer enhanced multiples for longer service.

Lower Fy+m Factor

A younger member has a longer time to retirement, leading to a greater discount on their benefit's present value. The effect is non-linear, value increases sharply as retirement nears.

The Myth of Straight-Line Apportionment

Some try to apportion defined benefit interests using a simple year-based formula, such as the West and Green approach. But this does not reflect the true financial growth of the benefit over time.

Because the three valuation inputs compound in a non-linear manner, the Family Law value 10 to 15 years ago is often much less than a straight-line proportion would suggest.

Practical Implications for Family Lawyers and Financial Experts

• The defined benefit interest should be properly valued by a qualified expert familiar with the relevant fund rules.

• Attempts to apportion based solely on years can lead to significant misrepresentation of true contributions and entitlements.

• If a party seeks to assess the value at cohabitation or during significant life events (e.g. career changes), a full actuarial-style recalculation is essential.

Meeting with Gavin Bateman

Book Now

Disclaimer:

The information provided in this article is general in nature and does not constitute personal financial, legal or tax advice. While every effort has been made to ensure the accuracy of this content at the time of publication, tax laws and regulations may change, and individual circumstances vary. Dolman Bateman accepts no responsibility or liability for any loss or damage incurred as a result of acting on or relying upon any of the information contained herein. You should seek professional advice tailored to your specific situation before making any financial or tax decision.