The Ministry of Business, Innovation and Employment (MBIE) is proposing law change after the Court of Appeal ruled that KiwiSaver funds are beyond the reach of the Official Assignee.
The effect of the ruling is to provide a higher level of protection for KiwiSaver balances than for other forms of retirement savings.
MBIE is seeking feedback on a range of options to create a uniform policy approach to the use of retirement savings in bankruptcy.
Submissions close on 30 September 2016. We encourage you to make a submission.
When a person is declared bankrupt, assets such as houses or direct investments into managed funds are accessible to repay creditors. However, the treatment of the assets held in KiwiSaver accounts and other retirement schemes differs depending on the type of scheme.
A recent Court of Appeal declaratory judgment1 brought by the Official Assignee confirmed that KiwiSaver balances are not to be used to repay a bankrupt’s creditors.
Other retirement schemes do not receive the same level of protection. Access to these savings to repay creditors is governed by the rules set out in the individual scheme’s trust deed and the Insolvency Act 2006.
Possible options for distributing retirement savings
In Accessibility of retirement savings in bankruptcy for the repayment of creditors MBIE has set out three broad options for reform.
- Option 1: all retirement savings of a bankrupt member to be available to the Official Assignee (excluding any Crown contributions).
- Option 2: allowing all personal retirement savings contributions to be accessed by the Official Assignee (excluding Crown and employer contributions).
- Option 3: allowing the Official Assignee to access a fixed percentage (say 50%) of all retirement savings, including Crown and employer contributions.
Commerce Minister Paul Goldsmith says these options are designed to start discussion and that further alternatives will be open to consideration.
A further option, not specifically stated in the Discussion Document, is that none of the retirement savings ought to be available. An exception would remain for voidable payments made into the scheme prior to bankruptcy.
Additional issues raised by MBIE
Other issues MBIE has raised are:
- the impact on alternative debt repayment procedures – MBIE acknowledges that the inclusion of retirement savings will increase the realisable assets available to the Official Assignee and may result in removing a debtor’s eligibility for alternative procedures such as No Asset Procedure or Summary Instalment Order
- how vesting schedules in non-KiwiSaver retirement schemes will be treated
- priority of assets – the easy convertibility into cash of retirement savings means they are accessed first, which may allow bankrupts to exit bankruptcy sooner without having to sell other assets such as a house
- foreign sourced retirement savings – should these also be available to creditors, given that both Australia and the United Kingdom allow retirement savings accumulated in those countries to be transferred to certain schemes here, and
- as the amount received by a member of a defined benefit scheme is generally based on years of membership and a final average salary, further consideration needs to be given as to how bankrupt members of these schemes should be treated.
This is an important potential reform that will have practical implications for retirement savings providers. The first question that MBIE ought to consider is whether the Court of Appeal’s decision should be overturned at all. Should KiwiSaver balances be available for a bankrupt’s creditors?
Is it right that KiwiSaver and other retirement savings schemes be subject to the same rules? The Discussion Document assumes that all retirement schemes should be treated the same, but is that an appropriate assumption?
Each of the Ministry’s options would result in some of any KiwiSaver account remaining beyond the reach of the Official Assignee. But the Discussion Document does not comment on the practical issues that arise from that.
What happens, for example, if during a bankruptcy a bankrupt dies, reaches retirement age or becomes eligible in some other way for withdrawal of the protected funds and withdrawal is sought? Do the funds remain protected? Do they continue to be outside the estate available to the Official Assignee?
The Official Assignee’s current view appears to be that funds that are to be paid to a bankrupt member from his or her KiwiSaver account immediately become available to the bankruptcy. Is that in keeping with the policy aims described in the Discussion Document?
If such funds do vest in the Official Assignee, who does the scheme provider pay the funds to - the bankrupt (or his or her personal representative) or the Official Assignee? The latter we expect, but these issues need to be resolved in any reform of the law.
Submissions on the Discussion Document close at 5pm on 30 September 2016. The submission form is available on MBIE’s website.
If you have any questions in relation to the Discussion Document or you wish to make a submission, please contact one of our experts for advice.