The Court of Appeal in England has confirmed that a Trustee in Bankruptcy (“TIB”) cannot force a bankrupt person to elect to take their uncrystallised pension benefits solely so that the TIB can recover the benefit as income for the member's creditors. The decision in Horton v Henry (2016) clarifies the legal position after previous conflicting judgements had been given by the Courts. This is all the more significant in light of the recent legislative changes allowing some members flexible access to their benefits from age 55, meaning that, depending on the outcome of the case, a TIB could in some cases potentially have been able to compel a member to have taken all of their uncrystallised benefits in lump sum form sometime in advance of the member’s intended retirement.
The Welfare Reform and Pensions Act 1999 (the “WRPA”) provides generally that if a person is made bankrupt, their future pension on retirement is outside the pool of assets available to a TIB, protecting their pension from creditors. However, if that person is already receiving a pension when they are made bankrupt, the TIB can apply for an Income Payment Order (“IPO”) (or the equivalent of a Debtor Contribution Order in Scotland) compelling the bankrupt to transfer their pension income (above a certain minimum) to the TIB, for up to three years.
What WRPA does not specify is the TIB’s powers where a person is entitled to receive benefits (e.g. they have reached retirement age under their scheme’s rules), but has yet to elect to actually receive those benefits. For example, could a TIB compel the member to take their benefits in such circumstances against the member’s wishes? Contradictory judgements had previously been given on this issue.
Raithatha v Williamson (2012) concerned a bankrupt who was entitled to, but had not yet begun to draw, a personal pension. The TIB applied to the High Court for an IPO in respect of his undrawn pension funds on the basis it was ‘income’ to which he was entitled. The Court agreed, holding that unaccessed pension funds could be subject to an IPO, on the basis that to find otherwise would have the effect of creating two categories of pension income, an outcome that would not have been intended by Parliament. If an IPO was granted, the bankrupt would be compelled to elect to receive his benefits, only for it to immediately be diverted to the TIB.
Henry v Horton (2014) was a later High Court case with similar facts to Raithatha, where the member did not want to make any election concerning his uncrystallised pension policies, as he did not require income from them. The TIB nevertheless applied for an IPO in respect of undrawn pension funds requiring the member to exercise elections in order that benefits could be taken, in effect paving the way for the lump sum element of the member's pension to be taken. However, in Horton the High Court disagreed with the decision in Raithatha and refused the application, on the basis that the exact value of an undrawn benefit is not known until the member elects to receive them. This means that unaccessed benefits are not ‘crystallised’ as a contractual right and cannot be income forming part of the bankrupt’s estate, thus being incapable of being subject to an IPO.
The conflicting approaches taken by the Courts in Raithatha and Horton were a source of continuing concern in the pensions and insolvency industries. Since both cases were heard in the English High Court, it was unclear which judgement reflected the correct legal position. The issue became all the more pressing in light of the pension freedoms introduced from April 2015, which permitting some pension scheme members to elect to access their benefits flexibly as a lump sum from age 55 and so could be highly relevant if a TIP could compel the member to exercise those rights against the member’s wishes. If Raithatha was correctly decided, then if such a member became bankrupt they could potentially have been compelled to access their entire entitlements for the TIB’s benefit.
The TIB in Horton appealed the High Court’s decision, on the basis that the Court’s consideration of ‘income’ was too narrow. It highlighted the decision in Raithatha and also in Blight & Others v Brewster (2012), another High Court case in which a non-bankrupt scheme member was obliged to draw down his pension for the benefit of creditors. However the Court of Appeal disagreed, overruling Raithatha and finding that the previous decision in Horton had been correct. The Court of Appeal found that, when looking at insolvency legislation as a whole, Parliament had struck a deliberate balance between protecting pensioners’ savings on the one hand, and the rights of a bankrupt’s creditors on the other. In reading the relevant sections of WRPA, there was no basis to conclude an IPO could extend to rights which required further acts by the bankrupt to crystallise. Where there are concerns that pension savings have been improperly used to defeat potential creditors, the TIB has separate powers under the Insolvency Act 1986 to pursue these.
The Horton appeal seems to reflect Parliament’s intentions to remove most pensions from TIBs’ reach, ensuring only pensions which are already in payment can be affected by an IPO. This will provide welcome clarification for schemes, providers and members alike, however it should be noted that pensions in payment can and may be pursued if the relevant member becomes bankrupt. How much can be subject to an IPO will depend on the precise circumstances of the member. TIBs also remain entitled to recover unclaimed contributions where they can show these were excessive and made with the intent of defeating creditors.
In practice, the ruling may mean that some creditors will no longer petition for a member’s bankruptcy where pension rights form the greater part of the individual’s assets and a wide discretion is conferred on the member under the scheme over when they can access their benefits. Whilst the decision is limited to bankruptcies in England, it seems unlikely that the Scottish courts would depart from the approach adopted by the Court of Appeal.