Calls are being made for clearer rules around what happens to a person's KiwiSaver savings when they are declared bankrupt.
They come after a High Court ruling found the money could be put aside for creditors but should not be paid out until the bankrupt person is eligible for access to their retirement savings - typically at age 65.
Chapman Tripp partner Mike Woodbury said the ruling was an unsatisfactory answer to the problem and the KiwiSaver law needed to be fixed.
"It seems to us that the court has applied two tests of significant financial hardship - whether the bankrupt can meet his or her basic needs and [regardless of whether or not that is the case] whether the KiwiSaver balances are sufficient to deliver the bankrupt from the bankruptcy. It is difficult to see the authority within the KiwiSaver Act for the second test."
The act classifies financial hardship as someone who can not meet their basic needs. A person who applies for financial hardship can get access to their contributions and their employer's but not the $1000 kick-start or the government contributions.
The KiwiSaver scheme's trustee makes the decision on whether someone qualifies and may not pay out all of the money.
Clynton Hardy, northern regional manager for Trustees Executors, said until now trustees had ruled that bankruptcy did not automatically qualify a person for a financial hardship claim although it did allow access to the money if a person got into financial strife while in bankruptcy.
Hardy said the court case had backed up the view that bankruptcy did not automatically qualify a person.
But it was a Clayton's win for creditors who would not be able to get any of the money until the former bankrupt reached retirement. That posed challenges in paying the money as the official assignee may have to track down the creditors many years later.
"It just needs to be clarified. As a trustee we just want it clarified."
Hardy said his view was that retirement savings should be ring-fenced and creditors should not get access to the money at all. "They shouldn't be able to be touched by anyone. It seems to be contrary to public policy."
Woodbury said the issue needed certainty as it was being left too much up to individual circumstances.
Woodbury said it did not have a preference on what happened to the law but in Australia superannuation funds were ring-fenced from creditors unless there had been inappropriately high contri-butions before the bankruptcy.
"We are not pumping for any one particular fix."
Hardy said he was aware the Ministry for Business Innovation and Employment was working on a discussion document on the issue and expected it to be released for consultation in the coming months.
As of May last year, 2676 KiwiSaver scheme members were in bankruptcy.
The KiwiSaver balances for 1971 of them were cumulatively valued at $7,613,943 and the rest were unknown.
More than 2 million people are signed up to KiwiSaver.