By Kate Wild – Senior Associate
What is a non-commutable pension?
A non-commutable pension is a superannuation entitlement that provides an income stream for the recipient but cannot be withdrawn as a lump sum.
When it comes to reaching a property settlement between separated parties, the treatment of such pensions can vary significantly. The law around this issue is complex, and its application can substantially impact the outcome a property settlement.
When is a pension included as an asset in the asset pool?
In the leading case of Semperton & Semperton [2012] FamCAFC 132, the Court made it clear that it has discretion to treat a superannuation interest as an asset to be included in the asset pool.
Some examples of circumstances where it might be deemed appropriate to do so include:
- Where the parties agree to include the pension in the asset pool as an asset.
- Where the Court is satisfied the pension falls within the legal definition of ‘property’.
- Where the value of the pension is small compared to the value of the other assets.
When can a non-commutable pension be treated as a financial resource?
A financial resource is different to an asset. The term is not specifically defined in the Family Law Act 1975, but the High Court has determined that a financial resource is an item a person can draw upon for the purpose of generating income.
In the matter of Preston [2022] FedCFamC1A 157, the husband’s non-commutable military pension was formally valued by an expert and had a capitalised value of $638,109. That figure represented more than 15% of the combined value of the assets and superannuation. Neither party sought superannuation splitting orders.
The trial judge included the capitalised value of the husband’s pension in the asset pool and ordered a distribution of the matrimonial assets; 58.5% to the husband and 41.5% to the wife. The trial judge pointed in part to the husband’s greater income earning capacity.
On appeal, the Court found that the pension should not have been included as an asset and was a financial resource only. The Court considered that the pension was “…no more than a right, entirely personal to the husband, to receive defined income whilst medically unfit.”
The Court noted that the true value of the pension was conditional on the husband’s lifespan, and that if the husband passed away sooner, its value would be reduced.
The Court removed the pension as an asset, and the orders made by the trial judge were set aside. New orders were made providing for an equal distribution of the reduced asset pool.
The importance of valuing pension entitlements
As a first step, parties should look at valuing the pension. Obtaining a formal valuation and a detailed explanation of the methodology used for the valuation is key for advancing arguments about how the pension should be treated.
In the matter of Mayhew & Fairweather [2022] FedCFamC1A 53, the parties had elected not to obtain a formal valuation of the husband’s non-commutable pension. Instead, the capitalised value of the pension was agreed between the parties and the Court included it as an asset in the asset pool. The pension was then also taken it into account as income when assessing the parties’ future needs, and the wife received an adjustment of the assets in her favour.
The Full Court ultimately held that the trial judge had fallen into error by ‘double-counting’ the husband’s pension both as an asset and as income.
This is not to say that the Court can never take a non-commutable pension into account as both an asset and a form of income. However, to justify such an approach, you must be able point to evidence around the valuation methodology.
If you or your former partner have a non-commutable pension, you should get expert advice as early as possible. Call us on 03 8672 5222 to make an appointment with one of our experienced family lawyers.
