18 April 2021

Gareth Stears, pension technical consultant at Aries Insight, reveals an imminent development on debt recoupment


A new government initiative is arriving on the scene that will be of interest to the pension industry – but it could easily have passed us all by.

From 4 May 2021, the Debt Respite Scheme (‘the Scheme’) will be in operation. An authorised debt advice provider (or local authority providing debt advice) will be able to register their client with the Scheme at the Insolvency Service. They in turn will notify all the individual’s creditors that a ‘breathing space’ is in place.

The breathing space is a moratorium lasting sixty days (or longer, where difficulties with mental health are a factor) during which there are restrictions (which I’ll come to) on what creditors can do.

You might wonder what this has to do with providers of pensions. Members of the public don’t tend to owe pension arrangements money. It’s essentially the other way round, but sometimes pension arrangements overpay benefits. Then they need to recover the trust’s property (or the provider’s money). Although this probably isn’t the sort of debt the government had in mind, is it in scope nonetheless?

We checked the regulations. For a debt to qualify, it can be: “any debt or liability other than non-eligible debt.”

 

...Attachment of earnings orders, which are like recoupment, are specifically excluded...

 

So, it includes any debt or liability – in the general sense of the words – unless it is ‘non-eligible debt’. For the record, it includes debts incurred or due before 4 May.

The regulations provide a list (too long for mention here) of debts that don’t qualify for breathing space immunity. It includes things like the student loan, child maintenance, and debts incurred due to criminal activity. We checked, so you don’t have to.

Overpayment recovery by pension arrangements is not excluded (and therefore subject to the Scheme), with one exception: overpayments due to fraud by the debtor.

‘Fraud’ is not defined. In practice, the pension arrangement could appeal to an individual’s debt advisor that the overpayment should not qualify on grounds of fraud. Or, if the pension arrangement simply chose not to comply, it might be for a higher power to interpret ‘fraud’ to decide.

Note also that the fraud must be ‘by’ the debtor. If an overpayment is due back from a scheme member’s estate due to fraud by a greedy relative, the exclusion might not land its punch.

The good news is you don’t have to do anything until you receive a notification. Just make sure no one throws the notification in the bin.

During the breathing space (which I shall not abbreviate, as I like the Scheme), creditors must not:

make any attempt to recover the debt, nor

require the debtor to pay fees, penalties, or charges on the debt that accrue during the period, nor pay interest on the debt. (Interest can still accrue on the debt, but not on the arrears accrued during the breathing space.)

The Scheme doesn’t wipe the debt away. Rather, it gives the debtor a chance to work with their debt advisor, without pressure from creditors, and put together a plan to get back on track.

Pension arrangements should be careful when communicating with the individual. They cannot ask for repayment and should avoid mentioning the debt unless responding to a question about it or providing reassurance (e.g. explaining what it is happening with any interest).

Most importantly, arrangements must not take any ‘enforcement actions’ (which obviously includes ‘sending the boys round’). You should not attempt recovery during a breathing space.

But what about recoupment? This is where an overpayment is recovered from future instalments of benefit. The regulations tell arrangements not to: “take a step to collect a moratorium debt from a debtor.”

A pre-agreed deduction arguably isn’t ‘taking a step’ if it is automated and will happen unless an administrator ‘takes a step’ to prevent it.

Government guidance on the Scheme isn’t definitive on this, but says: “During the breathing space, the debtor should continue to pay any debts and liabilities they owe you. You can continue to accept these payments, including those you get from existing direct debits.”

Attachment of earnings orders, which are like recoupment, are specifically excluded from the breathing space. However, in the presence of doubt, it would be advisable to check with the debt advisor.

The government likely didn’t consider the pensions industry when publicising the Scheme. We don’t know how much effort they went to with more affected industries. But ignorance of the law is, famously, no defence against the consequences. We’re grateful to an Aries member for bringing this to our attention.

At least if a notification comes your way, you’ll have an idea what it’s about and what you should (and more importantly shouldn’t) do. 


Featured in the May 2021 issue of Professional in Payroll, Pensions and Reward. Correct at time of publication.