Understanding Family Law Defined Benefit Interests

The valuation of defined benefit interest in family law is a difficult and complicated feature of the Family law (Superannuation) Regulations 2001.

The family law valuation of almost all common defined benefit interests is based on the general principle of:

Fund multiple x Number of Years x Current Salary x Present value Discount

This can, for example been in the formula for the valuation of lump sum defined benefit interest in the growth phase:

ABM  x  Salary  x  Fy+m

where

ABM: is accrued benefit multiple (fund multiple x years service)

Salary: being salary for superannuation purposes at date of valuation

Fy+m: being the present value discount based on the number of years to retirement.

The family law value of a defined benefit interest will increase over time because of the effect of the three factors:

• Accrued Benefit Multiple will increase increase with years of service.
• Salary will increase with both general wage increases and promotions. The effect of promotions will result in significant increases because the interest is based on the final salary at retirement. For Family law purposes, the current salary is used rather than any projection of future salary.
• Present value Discount (Fy+m) will move closer to 1 at age 65. The fy+m factor is a discount multiplier applied to the interest on the grounds that the benefit is not receivable until age 65.

Whilst a number of funds have applied for Scheme specific factors, the basic principles of teh valuation of defined benefit interests sstill apply, however each fund has applied a different calculation of ABM that reflects the rules of that fund. The Fy+m factors have also been amended to reflect different discount rates and changes to mortality in teh general population.

We are often asked to provide calculations of members interest at the date of cohabitation in order to determine the contributions to the marriage. This is particularly the case where is the current Family Law value is very high.

However, the value of the interest at cohabitation is often very low because:

• The member was just starting their career at this time and was probably below average weekly earnings and salaries were much lower.The average earnings in 1983 was $18,824 and in 1993 were $ 31,850. Today average earnings are $57,710 per annum. A person's earnings are likely to be less than the average for that occupation early in their career and more in the later stages of their career. The point at which earnings exceed the average for the occupation as a whole depend upon the occupation and the skills associated with that occupation. Many professional will only reach the average at around 40.
• The accrued benefit multiple is low because of the number of years served compared to the current years of service. This relationship is usually linear (straight-line) but some funds pay a higher rate for longer periods of service.
• The Fy+m factor is lower. At age 30, the Fy+m factor is 0.4301, at age 40 is 0.5612, at age 50 is 0.7204 and at age 65 is 1.

As the combination of these factors increases the Family Law value of defined benefit interests over time, they also multiply to reduce the Family Law value when examining the value of an interest in the past.  The relationship is not a straight line but is a sharp curve. The Family Law value of an interest valued at 10 to 15 years in the past will be significantly less than a West and Green style apportionment based on years.