Superannuation Invalidity and Family Law Assessment of Contributions

Superannuation, Invalidity and Family Law Assessment of Contributions Peter Skinner PGS Superannuation peter@pgssuperannuation. com. au PGS Superannuation 1

Why I am presenting!! Crawford & Crawford [2012] FMCAfam 1315 (4 December 2012) – a judgment by Altobelli FM “Assisted” by a joint expert report, namely - statement prepared by Mr B of [S] (the wife’s expert) and Mr S of [P] (the husband’s expert) dated 5 November 2012 Para 53. ” Ultimately, neither Mr B nor Mr S’s expert evidence directly assists the court in assessing whether, and if so to what extent, the husband has made a contribution to the wife’s pension. I am currently preparing another joint expert report and I would like your input as to what would assist the court. Furthermore, I have another 4 similar cases that are likely to proceed to court PGS Superannuation 2

Why the Fuss? Invalidity payments from defined benefit schemes can be very large! PGS Superannuation 3

Invalidity Super Payments Police and military traditionally have had generous superannuation invalidity payments. Reflects the hazardous nature of their occupation. Superannuation preceded compensation payments so at one time in the past, an injured member might only be compensated through superannuation. Most NSW police retire on invalidity grounds – pension is 72. 5% to 100% of salary. Average is 45. Military schemes have always been generous – eg a 18 year old recruit could be given a benefit equivalent to serving to 60 years of age but payable immediately. FLVs range from $. 8 m to $1. 8 m PGS Superannuation 4

The Real Issue Invalidity superannuation payments were designed prior to the family law splitting regime. Can result in unintended consequences. Invalidity payments have to be unravelled or deconstructed to fit into the concepts of the Family Law Act. This has posed considerable challenges to practitioners and the Courts. PGS Superannuation 5

An Unintended Consequence Scenario Soldier returns from Afghanistan – suffers PTSD Marriage fails Discharged on invalidity grounds – pension $60, 000 Family Law Value is $1. 2 m Assets divided equally Wife has a CPI life time pension of $30, 000 Soldier’s health improves – pension now $15, 000 Further improvement – pension ceases Wife retains her pension irrespective PGS Superannuation 6

Outline This presentation will assist practitioners to: enhance understanding of invalidity pensions provide practical arguments to assist in negotiations 2 recent cases will illustrate the range of possible outcome and the disparity in considerations Address the issue of how experts can be more helpful to the Court PGS Superannuation 7

Form and Character of Invalidity Pensions Invalidity pension is not all retirement income Some compensation, some insurance type payment Only awarded by virtue of ill health No thought given to the consequences of splitting an invalidity pension in the FLA or Regulations Result is ad hoc approach by practitioners Precedent cases now emerging but. . . ! PGS Superannuation 8

Authority to Look Behind the FLV Well-known case of Coghlan and Coghlan [2005] Fam. CA 429; (2005) 67. If this approach is adopted, …, the real nature of the superannuation interests in question can also be taken into account, both in consideration of the s 75(2) matters and in the final assessment of whether the ultimate order is just and equitable. 68. When we refer to “the real nature” of the relevant superannuation interest, we are referring to the fact that notwithstanding that its value according to the Regulations may well be calculated to be a very significant amount, that superannuation interest may be no more than a present or future periodic sum, or perhaps a future lump sum, the value of which at date of receipt is unknown. PGS Superannuation 9

Difference in Family Law Values Day before discharged invalidity, FLV $165, 000 Day after, FLV $1. 2 m What has changed? Military will be the focus but applies to all occupations, especially police and fireman. PGS Superannuation 10

Current Defence Super Schemes A tiered approach Class A, - 60% or more incapacity Class B, - 30% to 59% or more incapacity Class C, - less than 30% incapacity Dual purpose of super has been maintained Injury does not have to be work related Mower example Pension only and (mostly) reviewed periodically Additional qualifications could allow other employment kinds to be taken into account - example PGS Superannuation 11

Current Scheme – Military Super Introduced actual and prospective service Is the prospective service a compensation element? Younger the age, the higher the prospective service and higher the compensation element Previous superannuation scheme (DFRDB) based compensation on 40 years service – even if the joining age was say 45 years. Illustrates the importance of understanding the rules of the super scheme PGS Superannuation 12

Super & Injury - General Most superannuation schemes offer some form of medical insurance Most accumulation schemes only offer insurance on a fee for service basis Most defined benefit schemes provides coverage for sickness or injury However, only the military have a tiered approach Other schemes require the person to be totally and permanently incapacitated Limited life expectancy and no possibility of ever working again is the criteria Consequently, most other schemes pay lump sums although some defined benefit schemes pay a pension PGS Superannuation 13

Are Splittable Payments Made from an Invalidity Pension? For schemes that have scheme specific factors, the invalidity pension is splittable in the same way as a retirement pension For the rest, the Regulations provide an amnesty for the first 2 years where total and permanent incapacity has not been established Caters for the period where payments are made during an assessment process PGS Superannuation 14

What Happens to the Non-Member Spouse if Member’s Health Improves? 2004 Orders provide for a clean break between the parties as a consequence of a split Neither party influences the other’s holdings An improvement in the health of the member will not result in a diminished benefit for the non-member spouse On the other hand, if member health improves, he/she will only have 25% of the pension in the first review (50% reduction due to split, 50% reduction due to health improvement) Second review could result in no pension – only fully preserved lump sum Non-member spouse enjoys CPI indexed pension for life without any reviews PGS Superannuation 15

Double Counting – Asset and Income Is it double counting to count the invalidity pension as both an asset and an income stream This appeal case DJ & AJ [2006] Fam. CA 961 involved a husband who was on an invalidity pension of $52, 146 pa. The husband objected to his super being included in his income asserting that it was double counting to include it as an asset and as income. The wife’s income was $40, 000. The family law value (FLV) of the husband’s superannuation in the growth phase was $407, 000 and $865, 000 in the payment phase Outcome: - The Full Court of Bryant Finn & Coleman dismissed the appeal. The Court ruled that the nature of the “income” is different. The wife earned her income by her own labour whereas his income was through superannuation. The husband does not have to work for his income – the wife does! Importantly, there was no argument presented in this case that sought to identify the compensation component of the invalidity pension. Compensation for personal injuries has rarely been shared equally between the parties. PGS Superannuation 16

What Do the Trustees Provide? For an invalidity pension, the superannuation information form provides no information Pension is noted as an invalidity pension Practitioners must look elsewhere for useful information in relation to the invalidity pension PGS Superannuation 17

Family Law Valuations No useful information except for the FLV If scheme specific factors are used, the FLV reflects the actuarial longevity of invalid pensioners FLV is 15 to 20% lower – reflecting lower life expectancy If no scheme specific factors, FLV uses default factors which do not differentiate between invalids and retirees Above can be used to argue the case for a discount off the FLV PGS Superannuation 18

Peeling Back the Onion The increase in the FLV relative to the day before receipt of the invalidity pension is due to a sole event – an injury or sickness preventing continuation of employment The question arises as to how can practitioners isolate the compensation or insurance part of the FLV Examine 2 cases – both delivered in Dec 2012 Crawford - [2012]FMCAfam 1315 – most recent and best argued, and Doran SYC 6943 of 6 Dec 12 PGS Superannuation 19

Crawford & Crawford [2012]FMCAfam 1315 Judgment of Altobelli, 4 Dec 2012, Sydney Both age 46, both joined Police Force in 1986 Wife – hurt on duty pension from 2006 – FLV $1 m Husband – Police Officer – FLV, $. 6 m 2/3 asset pool is super Separated in 2009 after 20 year relationship – 3. 5 years before hearing 3 children – 17, 14 & 12. PGS Superannuation 20

Contributions until Separation Each of the husband wife contributed diligently, and faithfully, albeit in slightly different ways There is no evidence before the court that warrants a finding of greater contribution as the end of a long and productive relationship There is an issue about assessment of contribution in the 3. 5 years post separation – discussed next PGS Superannuation 21

The Issues + How Many Pools Most complex issue in this case is how the wife’s pension should be considered within the section 79 adjustment process. Also section 75(2) considerations What approach for the section 79 –process? ? Husband contends for a global approach – a single pool Wife – 3 pools. Non-super assets, wife’s pension & the remaining super assets with assessment of contribution & future needs differentiated for each pool PGS Superannuation 22

Orders Sought Wife – husband to pay her $50, 000 Husband – wife to pay him $257, 244 Common ground Each to retain one property + assoc mortgage Each to retain their respective superannuation Neither sought orders for super to be split Polarity – direct results of how the wife’s pension is to be treated PGS Superannuation 23

Applicable Law Preferred approach Hickey & Hickey 4 interrelated steps Identify property & financial resources Identify contributions Identify other factors under s. 79(4)(d) inc s. 75(2) and determine any adjustment to step 2, and Consider whether above is just and equitable Acknowledged that the High Court’s recent decision in Stanford v Stanford (14 November 2012) [2012] HCA 52 may signal a departure from the approach described above. To the extent that this may be the case it has no bearing on the outcome of this case. PGS Superannuation 24

Applicable Law - cont Global or asset by asset approach to contributions? Authority is the High Court’s decision in Norbis v Norbis [1986] HCA 17; (1986) 161 CLR 51 Either is available – in part or in whole Discretion should be exercised having regard to the facts In relation to add-backs, the applicable law can be found in decisions such as the Full Court's Decision in AJO v GRO [2005] Fam. CA 195; (2005) FLC 93 -218 three clear categories of cases have emerged where it is appropriate to notionally add assets that no longer exist. After discussion, no add backs allowed “The parties have already separated. It is just and equitable to alter the parties’ interests: s. 79(2); Stanford (op. cit. )” PGS Superannuation 25

Assessment of Contributions – excluding wife’s pension Up to date of separation, assessed to be equal Wife contends greater contribution due to parenting post separation. By declining to make the add-backs contended on the husband’s behalf, the effect was to equalise financial burdens in the post-separation period. PGS Superannuation 26

Contribution – the wife’s pension 2 competing expert witnesses – both giving competing evidence in favour of their client Wife – contends separate pool and contributions should be assessed in her favour at 82% Husband contends – global and equal contributions Weight of authority favours separate pool approach, particularly when the benefit cannot be commuted to a lump sum Real issue for wife’s pension is how to assess contributions to it. PGS Superannuation 27

The wife’s pension Periodical, indexed, and only became payable because wife was hurt on duty Designed to replace lost income and is not compensatory in nature Continues until death Experts – whether is was possible to break down the pension into components to facilitate a contributions based assessment That part that is not lost income could be viewed as a contribution by the husband Experts – not directly helpful. Indirectly, however, their evidence confirms that in reality the wife’s pension does have some component to it that is not exclusively referable to her injury. PGS Superannuation 28

Assessing the husband’s contribution to the pension is more art than science. A fact conceded by the wife who submits his contribution should be assessed at 18 per cent. Other cases might provide some guidance, but ultimately each case is different, and thus different judicial approaches might be warranted: In T & T [2006] Fam. CA 207 the non-beneficiary spouse was awarded 15 per cent. In Schmidt & Schmidt [2009] Fam. CA 1386 (2 April 2009), it was 10 per cent. In Wheeldon & Wheeldon [2011] Fam. CA 40 it was 15 per cent, Treloar & Treloar (No 2) [2007] Fam. CA 1127, 15 per cent, and in Hayton & Bendle [2010] Fam. CA 592 it was also 15 per cent. PGS Superannuation 29

Compensation= no contribution “Once it is accepted that a sizeable component of the value of the pension merely compensates the wife for the income she is no longer earning, there can be no logical basis for claiming to have contributed to this. ” para 55 “If the husband’s case is that he did make significant contribution to the compensation component of the wife’s pension, it is a poorly articulated case. The court accepts, however, that over a long marriage he did make a contribution to what Mr S described as the retirement component. ” para 56 “Doing the best the court can do under the circumstances, the court would have in fact assessed the husband’s contribution to the wife’s pension at 15 per cent. As the wife herself proposes 18 per cent, a figure which is well within the reasonable range. . ”. PGS Superannuation 30

Section 75(2) considerations Court accepts 3 pools – 2 super + non-super 82%, 37% (husband’s super would have accepted higher but that is what wife contends) and 50% S 75(2) considerations Husband double the income, wife’s care of the children 12, 14 & 17 Acknowledged potential for double counting between s 79 and s 75(2). Excluded super from s 75(2) 10% adjustment on non-super pool. Result 60% to wife. PGS Superannuation 31

Just and Equitable “If orders are made to reflect the above, would this be just and equitable? The answer is that it is as just and equitable as the circumstances permit. Both parties end up with homes that are encumbered by manageable mortgages, especially if the husband uses the payment to him to reduce his mortgage. Both have an income: for the wife it is for life, for the husband it is till retirement at which time his superannuation will be available to him. The particular challenge of dealing equitably with the wife’s police pension is also dealt with adequately. ” PGS Superannuation 32

Doran and Doran Family Court Delivered 6 Dec 2012, judgment of Fowler J Duffin & Duffin pseudonym but not yet published Husband ex NSW police, hurt on duty pension since 2000, suffering PSTD His FLV $1, 046, 350. Her super negligible. Other assets $2 m One child age 22 self supporting One independent expert – 3 paras (63, 64 &65) – description only – no analysis Husband contends zero value for his super. PGS Superannuation 33

Doran & Doran - continued Section 79(4) contributions – para 84 & 85 “It is the view of the Court that the pension until age of commutation is an amount designed to replace income which would normally have been earned by a Police Office but which by reasons of the consequences of the injury are no longer available to him” “It is in effect significant part compensation for loss of income and, to the extent that it represent lost income, there is no reason why it should not be treated to that extent as earned income. ” Dismissed pain and suffering as no case was presented to the Court– para 86 PGS Superannuation 34

Doran & Doran - outcome Conclusions based on contributions – 58: 42 in favour of the wife S 75(2) considerations – mainly gambling and unexplained withdrawals. Outcome – 7% in wife’s favour Wife to receive 65% of real assets and 35% to husband Super – each party has capacity to work earning equal amounts. Adjustment to account for pre-marriage super +. . . ”the wife and her contributions to it have been indirect. ” 40% to wife, 60% to husband. Just and equitable – just stated. PGS Superannuation 35

Lessons Must provide evidence Need to argue the form, nature and character of the pension Should not assume that receipt of invalidity pension is sufficient to provide compensation for sickness. Health and capacity to still needs to be argued. Single independent expert did not provide any arguments and may not be appropriate for such cases PGS Superannuation 36

What Information Source Should the Practitioner Use? Most relevant information has to be requested From trustees From member Is the pension reviewable? What are the reasons for granting the invalidity pensions range of incapacity a signal Medical reports great value will address the likelihood of improvements PGS Superannuation 37

Options to Quantify the Amount of Compensation Compare the FLV before the invalidity event (it would then be in the growth phase) with the FLV of the invalidity pension, This excludes from the FLV of the invalidity pension the prospective years of service What would be shared is the superannuation earned up to the invalidity event Calculate the component of the pension that would be payable after retirement age PGS Superannuation 38

What Info Would be Useful to the Courts Crawford & Crawford Mr B (for the wife, the super invalidity member) – divided the FLV into pre 65 and post 65 values – 76% compo Mr S – FLV just before Compo event with FLV just after & using normal retirement age of 55 & 60 – 40% to 60% compo Doran & Doran No competing evidence No analysis PGS Superannuation 39

Case Listed for 11 Dec in Newcastle Mr S (for husband – the invalid) FLV before invalidity with just after invalidity Apportion FLV to retirement age and after retirement age Mr G Above division depends on whether the pension payment is replaced by employment income If so, whole of pension is superannuation If not, pension after retirement age is normal super Above shows the importance of “normal” retirement age PGS Superannuation 40

Is it Appropriate to Quantify NMS Contribution to the Invalidity Pension? Skinner is of the view that it may be of assistance to the Court for him to provide his opinion on the value of the Wife’s contribution towards the Husband’s Police Super interest. Skinner has included a summary of his opinion on this matter at section 3. 0 of this joint statement. Mr G. is of the view that the value of the Wife’s contribution is a matter for the Court to determine. PGS Superannuation 41

Conclusion Invalidity pensions require special consideration Substantive arguments supported by logical quantification will materially assist Expect the matter to be considered further by the Courts in the future END PGS Superannuation 42