External division in the context of pension sharing following divorce is compatible with the Basic Law when the provisions are applied in a manner that ensures conformity with the Constitution

Press Release No. 40/2020 of 26 May 2020

Judgment of 26 May 2020
1 BvL 5/18

When provisions on the external division of certain entitlements to workplace pensions are applied in a manner that ensures conformity with the Constitution, they are compatible with the fundamental right of property of both the person obligated to transfer a share of their pension and the person entitled to receive this share. This would also respect the limits constitutional law places on the de facto disadvantaging of women. In order to do so, when establishing the pension entitlement vis-à-vis another pension fund (external division), courts must determine the transfer amount in such a way that the entitled person does not face an undue reduction of their pension payments. The pension fund must be able to mitigate the burdens that can arise from this process by always retaining the option of opting for internal division. For these reasons, the First Senate held in its judgment pronounced today that § 17 of the Pension Sharing Act (Versorgungsausgleichsgesetz – VersAusglG) is compatible with the Basic Law.

Facts of the case:

These referral proceedings concern § 17 VersAusglG, which allows for an external division of certain entitlements to workplace pensions following a divorce even without the consent of the person entitled to receive a share of their spouse’s pension. In principle, pension sharing is carried out today by way of so-called internal division, which means family courts establish a pension entitlement for the person entitled to receive a share of their spouse’s pension vis-à-vis the same pension fund in respect of which their spouse also has a pension entitlement. However, pursuant to § 17 VersAusglG, upon request of the pension fund, pensions must be shared by way of so-called external division, even against the wishes of the entitled person. This applies to pension entitlements vis-à-vis a pension fund with direct employer contributions (Direktzusage) or vis-à-vis a pension fund with a defined-contributions scheme (Unterstützungskasse) if these entitlements do not exceed the upper earnings limit for the statutory pension scheme (Beitragsbemessungsgrenze). When the external division method is applied, the entitlement is not established vis-à-vis the pension fund of the spouse who is obligated to transfer a share of their pension, but vis-à-vis another pension fund.

So-called transfer losses are the key aspect of the order of referral. These derive from the way in which the current capital value of the share of the pension entitlement, accrued over the course of the marriage and to be divided in the context of pension sharing, is calculated. The current capital value is the basis for calculating the transfer amount that the pension fund of the obligated person must pay, as a capital amount, to the pension fund of the entitled person. This transfer amount, to be paid by the “former” pension fund, is calculated, inter alia, by discounting the interest on the total amount of the pension payments that might have been paid out in the future to the point in time at which the pension entitlement is assessed. If the discount rate is higher than the interest rate currently applied by the entitled person’s pension fund, this pension fund will usually set up entitlements based on the capital amount transferred to it, so that the entitled person can only expect pension payments that have been reduced accordingly. Effectively, this predominantly affects wives, not husbands.

Key considerations of the Senate:

§ 17 VersAusglG is not unconstitutional.

I. When § 17 VersAusglG is applied in a manner that ensures conformity with the Constitution, it is compatible with the fundamental right to property of both the person obligated to transfer a share of their pension and the person entitled to receive this share. It also respects the limits constitutional law places on the de facto disadvantaging of women. In respect of external division, courts must determine the transfer amount in such a way that the entitled person does not face an undue reduction of their pension payments. The Act leaves courts the necessary latitude for such decision-making, of which the courts must make use.

1. Firstly, the fundamental right to property of the person obligated to transfer a share of their pension is restricted by the division of their current and prospective pension entitlements in the context of pension sharing. In principle, this restriction is justified under constitutional law given that it serves to establish an independent old-age or disability pension scheme for the entitled person. However, when such a deduction is not at least approximately reflected in the pension entitlement received by the entitled person, this can be unconstitutional.

2. In addition, the fundamental right to property of the entitled person is restricted by external division. This restriction must also be specifically justified in cases where, following an external division, the entitled person must expect pension payments lower than the amount that was deducted from the share of the obligated person and lower than what they would receive themselves if an entitlement vis-à-vis the original pension fund were transferred to them by way of internal division.

3. Thus, where assuming identical biometrical factors, external division pursuant to § 17 VersAusglG results in pension payments from the newly established entitlement that are foreseeably lower than what would be received in case of internal division or than what was deducted from the entitlement of the obligated person, this itself must be justified both vis-à-vis the person obligated to transfer and the person entitled to receive the share. Ultimately, however, external division pursuant to § 17 VersAusglG can be applied in a manner that is in conformity with the Constitution.

a) § 17 VersAusglG serves purposes that are legitimate under constitutional law. The provisions are aimed at protecting employers who granted workplace pensions by way of direct employer contributions or a defined-contributions scheme from extending their pension system to persons they did not themselves choose as a party to the contract. Indirectly, § 17 VersAusglG also serves to promote workplace pensions. It is a legitimate aim of the legislature to support this second pillar of old-age social security.

b) When the external division method is applied, an adequate balance between the conflicting interests must be struck.

aa) A weighing of interests must consider, on the one hand, the fundamental right to property of both the entitled and the obligated person as well as the limits constitutional law places on the de facto disadvantaging of women. For the Basic Law bars even those provisions that are phrased neutrally and are not aimed at disadvantaging, even implicitly, but that, in reality, nevertheless predominantly place women at a disadvantage. On the other hand, it must consider the legitimate interests of employers who have granted workplace pensions by way of direct employer contributions or a defined-contributions scheme: to be spared any additional burdens brought about by internal division, and any further costs in case of external division.. In this weighing, the disadvantages of external division must not be categorically shifted to the entitled person.

bb) Narrow limits are placed on the one-sided burdening of the entitled person – especially given that, due to how family and employment-related activities are allocated between spouses, it is predominantly women who are entitled to receive the transfer of pension shares and who are affected by the disadvantages of external division. The referring Higher Regional Court (Oberlandesgericht) stated that such a limit was reached when the discrepancy between the prospective and the original pension was more than 10%. This is not objectionable under constitutional law. Depending on the development of interest rates, limiting the reduction in pension payments to a maximum of 10% in the context of an external division pursuant to § 17 VersAusglG might lead to transfer amounts, which entail further costs for employers. However, employers can avoid paying such an amount by choosing the internal division provided for in § 10 VersAusglG, which always remains an option pursuant to § 17 VersAusglG and which must also remain so in court proceedings.

c) § 17 VersAusglG does not prevent courts from settling the sharing of pensions in the context of external division in a constitutional manner and, in particular, allows for a determination of the transfer amount that avoids foreseeable unconstitutional effects of external division. Thus, whether the fundamental rights of entitled persons are respected is a question of how the courts apply the relevant provisions to the specific case. While it is the pension fund that submits a proposal to the family court with respect to the determination of the transfer amount, this proposal is not binding.

d) In this regard, employers must retain the option of opting for internal division with regard to the transfer amount determined by the court.

II. The referral also claims a violation of the principle of equal division of assets following divorce (Halbteilungsgrundsatz). However, the matter of equally dividing assets in the context of divorce only concerns the relationship between the divorcing parties and not the balancing of interests set out in § 17 VersAusglG in respect of the entitled person and the employer. The principle of equal division of assets is aimed at ensuring equality between the divorcing parties and does not provide a suitable standard for balancing the interests of the entitled person and the employer.

III. § 17 VersAusglG is also constitutional when measured against the general guarantee of the right to equality. It is true that this provision disadvantages persons holding pension entitlements vis-à-vis a pension fund with direct employer contributions or vis-à-vis a pension fund with a defined-contributions scheme in comparison to persons holding entitlements to other workplace pensions who must accept a unilaterally requested external division only within the limits of the significantly lower amounts set out in § 14 VersAusglG. Furthermore, § 17 VersAusglG disadvantages persons holding pension entitlements that remain below the threshold set out in § 17 VersAusglG and who must therefore accept external division compared to persons holding pension entitlements that exceed the threshold set out in § 17 VersAusglG and are thus subject to internal division. However, both scenarios can be justified if the provisions are applied in the manner ensuring conformity with the Constitution set out above. In that respect, too, it is important how the courts apply the law.