Bankrupts’ KiwiSaver funds in focus

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If a bankrupt can retain retirement savings then they may enjoy a greater standard of living in retirement than experienced in pre- retirement, at the expense of creditors. Discussion paper Ministry of Business, Innovation and Employment

eople who go bankrupt would have to give part of their KiwiSaver savings to the official assignee to pay creditors under a proposed law change.

The Government has called for submissions on three options it has put forward as part of a shake- up to the law on bankrupts and what happens to their retirement savings.

The move comes in the wake of a Court of Appeal decision in April last year in which it was ruled that KiwiSaver money could not be used by the official assignee to pay creditors as it goes against the intention of the KiwiSaver Act 2006.

The Court of Appeal found that if creditors could access KiwiSaver funds, the “burden for providing for the welfare of individuals would fall back on the state”.

“The objective of the KSA [ KiwiSaver Act 2006] is to encourage long- term savings habits and the accumulation of funds that will increase the wellbeing and financial independence of individuals, particularly in retirement,” the Court of Appeal judgment found.

“There i s nothing in the KSA to suggest that a purpose of the legislation is to accumulate funds for the benefit of creditors in the event of the member’s bankruptcy.”

But the ruling has created an unequal treatment of retirement savings as some other private superannuation schemes are able to be accessed by the official assignee to pay out creditors and other forms of saving for retirement such as owning prop- erty, shares or managed funds must be cashed up to pay out creditors.

To level the playing field the Government has proposed three options:

All retirement savings are made available to creditors except for Crown contributions.

All personal retirement savings be made available except Crown and employer contributions.

Capping the amount made available at a fixed percentage of the total amount such as 50 per cent.

Penny Sheerin, a partner at law firm Chapman Tripp, said the Government was trying to create a balance between two competing priorities — the Insolvency Act, which allows creditors to be paid back, and the KiwiSaver Act, which locks money away to help people save for their retirement.

“It i s a very difficult position,” Sheerin said.

David Brown Douglas, executive director of the Trustee Corporations Association, which represents the trustee companies that make decisions on whether a person’s KiwiSaver money can be released, said it favoured the Australian approach which was to completely protect people’s superannuation from creditor claims.

One exception to that was if people were putting in large lump sums ahead of their bankruptcy in order to deny creditors.

But Brown Douglas said creditors

also had rights which meant “there is a real conflict here”.

The discussion paper released by the Ministry of Business, Innovation and Employment says that KiwiSaver accounts can have a significant asset value, and may provide an avenue by which creditors could be repaid a greater percentage of money owed.

In the year to March 31, 49 per cent of bankrupts had a KiwiSaver account, with an average balance of over $ 8000. The largest balance was $ 68,000.

It is proposing that a portion of those balances be made available to help pay creditors to promote a balance between retirement savings and insolvency law. It also claims that because of NZ Superannuation, most individuals will not be in poverty during retirement — even if they do not have additional retirement savings.

“Given the retirement income and retirement savings landscape in New Zealand, our opinion is that the bankrupt’s retirement income should not be funded by creditors, but continues to be primarily funded by the com- munity as a whole through New Zealand Superannuation.

“If a bankrupt can retain retirement savings then they may enjoy a greater standard of living in retirement than experienced in preretirement, at the expense of creditors,” the document also warns.

“It was a difficult one,” said Deloitte recovery partner David Vance. There was a balance to be found between fairness and pragmatism.

The regulators could look at how recovery worked in the companies area. So receivers could look back over a certain period that the company had been in difficulty — often limited to two years. So in the case of bankruptcy it could be that KiwiSavers over a certain period were liable. That would also offer some ability to assess whether there had been any abuse of the system. In other words if the the bankrupt had been deliberately channelling funds into KiwiSaver as a safe haven that would be noticed.

People have until September 30 to submit their views on the proposals.