RECOVERY OF EXCESSIVE PENSION CONTRIBUTIONS
As covered in Chapter 61, Part 1, the law [note 1] provides that where a bankruptcy order is made on a petition presented after 29 May 2000, an approved pension (see paragraph 61.4) held by the bankrupt will, generally speaking, fall outside of the bankruptcy estate. Similarly, the bankrupt may have protected rights under an unapproved pension scheme (see paragraph 61.8) which means that the pension rights would not vest in the trustee.
To avoid the potential risk that individuals facing bankruptcy may choose to place assets out of the reach of creditors by liquidating those assets and putting the funds into a pension scheme, the Act also has provisions [note 2] that allow the trustee to recover excessive pension contributions that have unfairly prejudiced the bankrupt’s creditors.
The provisions relating to excessive contributions cover both pensions that are excluded from the bankruptcy estate by the provisions of the Welfare Reform and Pensions Act 1999 (see paragraph 61.2) or due to their having protected or excluded rights (see paragraph 61.8).
It is not necessary for the provisions to apply to pension schemes not falling into either of those two categories as any such pension scheme would vest in the trustee of the bankruptcy estate and would be dealt with accordingly (see Chapter 61, Part 3).
Having considered the information and advice in this Part of the chapter, and having established that excessive contributions have been made, the official receiver should seek to instruct The Service’s antecedent recovery contractor at the soonest possible opportunity, where appropriate (see paragraph 31.4B.5). In the meantime, he/she should write to the pension company (copied to the bankrupt) and put them on notice that he/she considers that excessive contributions have been made into the pension and request that no payments are made out of the pension pending further instruction.
As explained in detail in Part 1 of this chapter, all antecedent recoveries where the amount to be recovered is over £5,000 are handled by The Service’s antecedent recovery contractor (see paragraph 31.4B.5). The advice and information in this Part of the chapter will assist the official receiver in understanding excessive pension contributions and assessing whether there is a matter for recovery to be passed over to the contractor.
The following are the areas on which the official receiver should, ideally, obtain information before instructing the contractor:
The antecedent recovery contractor engaged by The Service (see paragraph 31.4B.5) will only accept instructions where the amount to be realised is more than £5,000. Where the amount to be recovered is less than £5,000, it is unlikely to be appropriate to take further action. It would be difficult to show that any contributions below £5,000 were excessive. That said, in the extreme example of one payment of £4,000 (or similar) being made in the weeks prior to bankruptcy, the considerations would be different and the official receiver should consider entering into correspondence with the pension company to recover the payment. Any further action (for example, court proceedings) are unlikely to be worth the cost.
In addition to being excessive (see paragraph 31.4B.178), the contributions made to the pension scheme must be “relevant” contributions. The Act provides that relevant contributions are those:
In reality, it is unlikely that any contributions made to a bankrupt’s pension would not fall into one of these two categories.
There is no definition in the Act as to what may be considered an “excessive” contribution. Whether contributions to a pension are excessive or not would depend on whether the contributions unfairly prejudiced the bankrupt’s creditors (see paragraph 31.4B.179), and this, in turn, would depend on the bankrupt’s circumstances at the time he/she made the contributions [note 5]. For example, contributions made at the expense of a bankrupt’s business capital or other household expenses may be considered to be excessive. Similarly, consideration should be given to the bankrupt’s income and lifestyle and historical pension contributions. Contributions made by one bankrupt who continues to make contributions during difficult times may not be considered to be excessive whereas payments started by another bankrupt in similar circumstances may be considered to be so.
HM Revenue and Customs set a limit (for tax relief purposes) on the amount that can be contributed to a pension – this being 15% of remuneration. This figure should give the official receiver a reference point when considering whether payments to a pension by a bankrupt are excessive.
It is not necessary to show that the excessive contributions (see paragraph 31.4B.178) prejudiced the bankrupt’s creditors at the time they were made or that this was in the bankrupt’s mind when he/she made the contributions. It is necessary only to show that the effect of the contributions was to unfairly prejudice the creditors as at the date of the bankruptcy order [note 6].
Generally speaking, any contributions made in the period leading up to bankruptcy could be described as having prejudiced the bankrupt’s creditors. It is, therefore, important to show that the contributions unfairly prejudiced the creditors and, in this respect, it will be necessary to consider the circumstances at the time the contributions were made.
The trustee, in making enquiries into a bankrupt’s pension arrangement, has power to require a person responsible for the administration of the pension to provide him/her with such information regarding the arrangement that he/she may reasonably require [note 7].
Assuming the court is satisfied that the contributions made were excessive, then it may make an order restoring the position to what it would have been had the excessive contributions not been made [note 10].
The court may give effect to this order by further ordering that the person responsible for the pension (the pension company) makes a payment direct to the trustee [note 11]. The court may also make an order adjusting the sums payable by the pension company to the bankrupt to take into account the effective reduction in contributions [note 12].
The order is binding on the pension company and overrides the scheme’s rules so far as is necessary to give the order effect [note 13]. Any rules or enactments barring the assignment of pension rights do not apply to an order made under these provisions of the Act [note 14].
Where debits have been made to the bankrupt’s pension under a pension “sharing” arrangement (see paragraph 61.21), and the rights transferred to the third party are the fruits of excessive contributions, the court may treat the rights transferred as recoverable but, before doing so, recovery should be sought from the rights remaining with the bankrupt [note 15] [note 16].
The amount recoverable from the pension provider is the lesser of the amount of the excessive contributions or the value of the bankrupt’s interest in the pension [note 17].
Monies recovered under these provisions are comprised in the bankrupt’s estate [note 18].
[Back to Part 8 – Avoidance of general assignment of book debts]