In December 2014, the case of Horton v Henry saw the High Court determine that a bankrupt individual's uncrystallised pension fund was not available to satisfy his creditors. The decision breaks from previous case law and so raises questions around how other pension funds might be dealt with in bankruptcy situations.
In this case, Mr Henry could have applied to receive his pension fund as income and/or a lump sum prior to the date of the hearing. If he had done so, the money he received would have become income over which his trustee in bankruptcy might bring a claim. However, the court had no power to order Mr Henry to apply for the pension. His pension funds, worth around £1 million, were effectively "immune" from his creditors.
This decision went against the earlier High Court decision in Raithatha v Williamson and so creates considerable uncertainty for individuals, insolvency practitioners and the trustees and administrators of registered pension schemes. What's more, when planned reforms come into force in April 2015 and it becomes possible for many individuals to access their pension savings as a cash lump sum, we can expect pension funds to become a much more attractive target for trustees in bankruptcy.
An overview of the upcoming changes can be found in our earlier alerts on 'Budget 2014 actions' for defined benefit trustees and defined contribution trustees.
It is understood that the trustee in bankruptcy wants to take this case to the Court of Appeal, which would provide an opportunity to revisit Horton v Henry and Raithatha v Williamson and determine which was correctly decided. In the meantime, we review the Henry decision and offer some guidance for trustees and managers of occupational pension schemes on dealing with enquiries relating to bankrupt scheme members.
Background on the case
Mr Henry was declared bankrupt at the age of 58. At the time of his bankruptcy, he had a number of private pension funds which he had not yet drawn on. The estimated capital value of these funds was around £1 million and so, perhaps unsurprisingly, Mr Henry's trustee in bankruptcy applied to the court for an "income payments order".
In making this application, the trustee in bankruptcy relied on an earlier case (Raithatha v Williamson) which had decided that once an individual reached the age where they could apply to receive a pension, that pension fund was income to which the individual had "become entitled". Therefore, an income payments order could be made over it. It is worth noting, however, that in the Raithatha case, the court did not go so far as to consider the exact nature of the order given that the case was settled.
The judge in Mr Henry's case disagreed with the reasoning in Raithatha, however, and decided not to follow it. He decided that while Mr Henry could have asked for his pension to be put into payment, he had not done so, and until he made that application, he was not "entitled" to any particular sums of money. Further, there was no power in any insolvency legislation for the court to force Mr Henry to make an application for his pension.
The case therefore highlights the considerable difficulty which the courts face in determining how a pension fund should be treated on bankruptcy. On the one hand, in the light of greater flexibility in accessing pension savings from April 2015 (which means many more pension funds can be accessed as cash from age 55), the distinction between a pension fund and other investments is less clear now than it used to be; particularly in respect of personal pensions and occupational money purchase arrangements.
If a bankrupt has material assets in his pension fund, then you might argue that those assets should be available to his creditors. It's interesting in this respect that Mr Henry expressly stated that he did not intend to access his pension fund as he wished to pass it on to his children - an objective which may become increasingly common following forthcoming changes to the tax treatment of pensions on death.
On the other hand, as the judge noted in Henry, there is a multitude of financial decisions to be made before a pension can be put into payment. Will the individual take a cash lump sum? If so, what proportion of their fund will be used for this? How will the balance of the fund be used - annuity purchase or income withdrawal? And let's not forget all of the decisions around the timing of the pension, which can have a material impact on the value of the funds realised.
It seems unlikely that the county courts are currently set up to make these kinds of decisions on behalf of a bankrupt individual, at least without some assistance from a qualified financial adviser. The courts also have a duty not to reduce the bankrupt's income below what is necessary to meet his "reasonable domestic needs". It's therefore not clear whether a court would have to look ahead to the bankrupt's need for an income in retirement, or whether it is only concerned with ensuring the bankrupt maintains a reasonable standard of living during the bankruptcy.
The decision in Henry therefore leaves a significant unresolved conflict in the case law. We anticipate that the Court of Appeal will face the unenviable task in the future of deciding which approach is correct, but in the meantime, there is uncertainty for individuals, insolvency practitioners and those involved in running registered pension schemes.
Advice for Trustees and Scheme Managers
In the light of this uncertainty, what advice can we offer to those involved in running occupational pension schemes?
- If you are approached by a pension scheme member's trustee in bankruptcy, don't panic!
- Get your facts straight - there can be a big difference in the way the pension is treated depending on whether the member is a pensioner, active or deferred member.
- Remember your data protection and confidentiality obligations towards pension scheme members. The law places an obligation on the bankrupt individual to co-operate with their trustee in bankruptcy, but (in the absence of a court order) there's generally no direct legal duty as between the pension scheme and the trustee in bankruptcy.
- Check your rules carefully - some defined benefit occupational schemes provide for a member's pension to be forfeit in the event of bankruptcy. However, care needs to be taken to understand the way this kind of rule may interact with overriding statutory provisions that regulate the surrender of pensions.
If in doubt, trustees and managers of occupational pension schemes should take advice before acting.