PensionsOct 16 2019

How are pensions protected in a bankruptcy?

  • Describe the legislative position with regard to pensions and bankruptcy
  • Outline the case law that has affected this position over time
  • Explain the ways that pension funds can be claimed by a trustee in bankruptcy
  • Describe the legislative position with regard to pensions and bankruptcy
  • Outline the case law that has affected this position over time
  • Explain the ways that pension funds can be claimed by a trustee in bankruptcy
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Approx.30min
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CPD
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How are pensions protected in a bankruptcy?

This was a deliberate policy intention by parliament, and it followed up on recommendations from the Pensions Law Review Committee chaired by Professor Roy Goode earlier in the decade.  

In practice, this means that pensions do not automatically vest in the TIB.

They cannot therefore be claimed outright like other assets.

It is important to note that this only applies to pension schemes that are registered with HMRC, which the legislation refers to as ‘approved pension arrangements’.

This means that schemes like Employer-Financed Retirement Benefit Schemes (EFRBSs) might not have the same protection.

How can TIBs get money out of pension schemes?

A TIB is not completely without recourse, however. And the Insolvency Act 1986 provides them with two mechanisms by which they may be able to claim pension funds:

  1. An excessive contributions order under section 342A 
  2. An income payments order under section 310.

To claim excessive contributions, a TIB must persuade the court on two points.

Firstly, they must argue that the contributions were paid with a view to putting them beyond the reach of creditors.

Secondly, they must demonstrate that the contributions were excessive in view of the debtor’s personal and financial circumstances at the time.

To the best of our knowledge, there is no officially reported case law on excessive contributions, so it is difficult to provide much guidance on how a court might assess such a case.

Anecdotally, however, we are aware of a small number of cases having been successfully pursued.

Income payments orders, on the other hand, are a lot more common.

Here, a TIB must persuade a court that the debtor is receiving income from a pension that is beyond their ‘reasonable domestic needs’.

If there is such a surplus, a court may grant an order for the TIB to claim some or all of it.

If the debtor has a defined benefit scheme pension or a lifetime annuity, there is an obvious source of regular guaranteed income that the TIB can point towards, making an income payments order reasonably straightforward.

Where the debtor has a drawdown fund, however, it is less clear to what extent a TIB is able to claim income, particularly if the debtor is drawing ad-hoc irregular amounts or even no amounts at all.

Forced crystalisation – recent court cases

The legislative provisions, as described above, had been in force since 1999, so were well-established and accepted law. 

That was until the 2012 High Court case of Raithatha v Williamson.

This marked the start of a chain of developments leading us to the somewhat nuanced position we now have regarding pensions and bankruptcy.

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