Rules for bankrupt KiwiSaver members cause concern

A Court of Appeal ruling has given KiwiSaver balances more protection than other retirement savings when someone enters bankruptcy - a situation that has the Ministry of Business, Innovation and Employment concerned.

Monday, August 15th 2016, 4:00PM

MBIE wants to change the law after the ruling put KiwiSaver funds beyond the reach of the Official Assignee.

MBIE is seeking submissions on its options to create a uniform policy approach to retirement savings in bankruptcy.

When a person is declared bankrupt, assets such as houses or direct investments into managed funds are normally accessible to repay creditors.

But the treatment of the assets held in KiwiSaver accounts and other retirement schemes differs depending on the type of scheme.

At the beginning of last year, there were 5559 bankrupts with KiwiSaver accounts with a total known value of over $27.3 million. The average value of these accounts is $6070.

One of the bankrupts, Mr T, has been a member of a KiwiSaver scheme since 2007 and was adjudicated bankrupt in June 2010 at the age of 25. His proofs of debt amounted to $26,254 although there may have been other unproved debts. There are no assets in the bankrupt estate other than Mr T’s KiwiSaver interest amounting to $11,860.46 at the date of adjudication.

The second bankrupt, Mr H, has been a member of a KiwiSaver scheme since January 2008. He was adjudicated bankrupt on Novembr 4, 2010, at the age of 34. Claims notified by creditors amounted to a sum in excess of $32,000 although proofs of debt for only $9,583 were actually received. Mr H has no assets other than his KiwiSaver account and a small tax refund. His KiwiSaver interest totalled $10,805.98 at the date of adjudication.

The Official Assignee asked Trustees Executors to release the funds in the KiwiSaver accounts of the two bankrupts under the significant financial hardship provisions of the KiwiSaver Act.

It refused to release the funds, contending that the KiwiSaver interests of the bankrupts were not property and did not vest in the Official Assignee on their bankruptcy. It took the view that, in any event, the significant financial hardship provisions of the KiwiSaver Act would not permit the early release of the funds.

The Court of Appeal backed Trustees Executors.

But 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.

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 of all retirement savings, including Crown and employer contributions.

Commerce Minister Paul Goldsmith said the options were designed to start discussion and that further alternatives were open to consideration.

A further option 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.

It is also asking whether foreign savings should be made available, and whether it matters that easy liquidity 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.

Submissions close at the end of September.

Tags: KiwiSaver