Up until a couple of weeks ago if someone had mentioned Horton to you then you might have reached for the collective works of Dr Seuss rather than the Balliol law service to see what it was all about. However, for the pensions industry the importance of the latter in terms of the treatment of pensions for bankrupts is far more interesting, albeit slightly less entertaining. The case of Horton v Henry eventually made its way to the High Court which heard the appeal in April and handed down its judgement on 7 October 2016. I won’t go into all of the background as my colleague Andrew Kerrin has summarised it in superb detail in his blog “Hinton Heralds Horton: Creditors Hurt, Bankrupts Heartened, Trustees Helped”. It really is worth a read.
Here is the brief summary/timeline
- Before 2000 pensions formed a part of a bankrupt’s estate and could be taken by the Trustee in Bankruptcy (TiB is much shorter) once the bankrupt reached pension age.
- Since 29 May 2000 all pensions were excluded from a bankrupt’s estate, thanks to the Welfare Reform and Pensions Act (WRAPA) but a TiB could apply for an Income Payments Order (IPO) to get hold of some, or all, of the pension in payment.
- In 2012, a case called Raithata v Williamson set out that if you were over pension age the TiB could make you draw your pension and an IPO could apply.
- In 2015 Pension Reform was introduced. This allowed you, from age 55, to vest your whole benefit as cash (and pay tax). If you applied the logic of Raithata then, if a scheme or arrangement allowed this, why could the TiB not force you to take your whole benefit as cash for the benefit of your creditors? A much more attractive option than perhaps just three years pension payments. Great for creditors, but not very good for the bankrupt.
This takes us on to Mr Henry, a bankrupt. The salient fact was his TiB tried to make him exercise his rights to take benefits, which were not in payment. The case went to Court and the Judge disagreed with the outcome of Raithata and ruled that, as was found in a previous case called Hinton v Wotherspoon, it was a step too far to say that the TiB could exercise a right to draw pension. The TiB, Mr Horton, was not convinced and sought leave to appeal which was granted.
The Court of Appeal considered all the facts and agreed with the first instance decision. The Court of Appeal Judges ruled that the Judge in the Raithata decision had not fully appreciated the intention behind WRAPA. The legislation had never intended to cover rights under pension schemes. Hurrah, I have heard many say. Great news for pensions and bankrupts. Well yes, I suppose it is but I might be a little less effusive in my joy for bankrupts once I spare a bit of thought for the creditors who are affected by this. That said, the law is clear, as is Parliament’s intention, so it is by design rather than luck. For Trustees of Schemes who offer pension freedoms it is, however, very good news as there is no uncertainty about what a TiB can ask for.
One final thought on pensions and bankruptcy. The Government was planning to put in place the ability to sell an annuity from April 2017. On Tuesday 18 October they performed a U-Turn and decided that this would not now happen. There was a school of thought developing that whilst someone could not be compelled to sell their annuity if they were a bankrupt, thanks to the clear decision in Horton, the fact that they had a large annuity and didn’t sell it could mean that they were effectively solvent and could not be made bankrupt? The U-turn has meant that this particular tricky conundrum is not one that the Insolvency Service now needs to ponder. Perhaps I should have changed the blog title to Bankrupts 2 – Creditors 0.