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

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.

Raithatha related to income payments orders and whether they could be applied to defined contribution pensions that weren’t yet in payment. 

The TIB took the line that because the normal minimum pension age was 55, a debtor ‘became entitled’ to the pension income on their 55th birthday.

The TIB then successfully argued that, regardless of whether the debtor had elected to crystalise their pension, an income payments order could be applied based on the theoretical entitlement that existed.

In practice, this meant a debtor could be compelled by the TIB to crystalise their pension, following which the TIB could apply an income payments order to it.

A lot of commentators viewed this as a somewhat controversial decision and not entirely in keeping with the spirit of the legislation. 

Many therefore welcomed the decision in a later High Court case in 2014 of Horton v Henry, where a different view was taken.