Protecting pensions against creditors — the Manolete case

Legal protections for pension rights

The Court of Appeal has confirmed the protection which the law gives to pension rights against creditors. Trustees of registered occupational pension schemes may be faced with claims by creditors of a scheme member, or by the trustees in bankruptcy of a bankrupt member, against the member's pension rights under the scheme. Pension rights under registered occupational pension schemes are generally protected against the claims of creditors and against the claims of a bankrupt scheme member's trustees in bankruptcy, but there are exceptions, and this position has been challenged from time to time in the Courts.

Case overview: Manolete Partners PLC v White

The Court of Appeal gave judgment on 15 November in the case of Manolete Partners PLC v White. The Court held that where a member of a registered occupational pension scheme, in that case a SSAS (a small, self-administered scheme), had accrued rights under such a scheme, but had no entitlement to immediate payment of benefits from the scheme, those accrued rights are generally protected against a claim from the member's creditors.

The member's ability to draw benefits from the scheme in Manolete was subject to the agreement of the trustees under the scheme rules. The Court of Appeal held that a creditor of the scheme member, Mr White, could not compel Mr White by a Court order to elect to draw his pension to meet the creditor's claims, or to request the trustees' agreement to draw his pension to meet those claims. This was notwithstanding that the member in that case, Mr White, had already designated part of his accrued rights as available for drawdown, that the scheme was a SSAS of which Mr White was the only member, Mr White was the owner and a director of the sponsoring employer of the SSAS and that only Mr White and his son were the trustees of the scheme.

Contrasting decisions: Manolete and Bacci v Green

The decision in Manolete has drawn comparisons with the earlier case of Bacci v Green. While both cases involved creditor claims on pension rights, their outcomes differed significantly due to variations in the schemes and the nature of the claims. This contrast highlights the nuanced application of legal principles.

In the case of Bacci v Green and in the High Court in Manolete, the High Court had held that a creditor could compel the pension scheme member by a Court order to elect to draw his pension so as to meet the creditor's claim in these circumstances. The Court of Appeal overturned this ruling of the High Court in Manolete.

This was notwithstanding that Mr White's case was not particularly meritorious; the creditor, Manolete, alleged that Mr White had breached his fiduciary duties as a director of the sponsoring employer by causing the employer to make a series of substantial payments in the 20 months before the employer went into administration. The payments included payments towards a number of luxury cars, a helicopter and foreign holidays for Mr White, payments towards Mr White's home and rent on his son's flat. The Court of Appeal held that the position would be otherwise, as in Bacci v Green, where the member was guilty of fraud. In the event of fraud, the member's pension rights would not be protected against creditors.

The Court of Appeal held that Mr White's pension rights were protected against claims from creditors because of a strong principle laid down in statute that pension rights under a registered occupational pension scheme are not assignable (subject to limited exceptions). Section 91(1) of the Pensions Act 1995 so provides. Section 91(2) of the Pensions Act 1995 provides that no order can be made by any Court the effect of which would be that the pension scheme member would be restrained from receiving his future pension (where there is no entitlement to immediate payment of pension). The Court of Appeal held that for a Court to compel Mr White to elect to draw his pension would breach section 91(2), because although the pension would be paid to Mr White, the creditor (Manolete) would immediately require payment of the pension to it, the creditor. So such a Court order would in reality prevent Mr White from receiving his future pension.

Mr White under his SSAS was treated in the same way as a member of any other registered occupational pension scheme would have been in those circumstances.

The pension rights of a bankrupt member of a registered pension scheme are also statutorily protected against claims by the member's trustees in bankruptcy. Section 11 of the Welfare Reform and Pensions Act 1999 achieves this effect by excluding such pension rights from a bankrupt member's estate.

Mr White's case must be distinguished from that of a member who is drawing pension from a registered pension scheme. A creditor of the member may enforce a judgment against, and a bankrupt member's trustees in bankruptcy may claim, part of such pension which is in payment, by way of an income payments order or an attachment of earnings order. Further, if "excessive contributions" have been made to a bankrupt member's pension scheme, pension rights derived from such excessive contributions may be claimed by the member's trustees in bankruptcy under sections 342A to 342C of the Insolvency Act 1986.

Further exceptions to the protection of pension rights

A further exception to the protection of pension rights against creditors applies where a member of a registered occupational pension scheme owes a debt to the sponsoring employer of the scheme due to a criminal, negligent or fraudulent act or omission by the member. The employer may then have a claim against the member's pension rights in respect of that debt, if the amount of the debt is agreed or is laid down by a Court order. No such criminal, negligent or fraudulent act or omission was alleged against Mr White.

Final thoughts

Finally, the above statutory protections for pension rights against creditors do not apply to an unregistered pension scheme, such as a pre-2006 FURBS (funded unapproved retirement benefits scheme). Pension rights of a bankrupt scheme member under such an unregistered pension scheme may be protected against the member's trustees in bankruptcy and creditors by way of a forfeiture clause in the scheme trust deed, which provides that the member's pension rights are forfeited in the event of bankruptcy.

The Manolete Partners PLC v White case underscores the complexity of pension protections. While pension rights are broadly safeguarded against creditors, exceptions remain a critical consideration for creditors and trustees alike. This case serves as a reminder of the delicate balance between preserving retirement savings and preventing misuse.

For advice in this developing area of law please contact Jeremy Harris or David Gallagher.