A High Court ruling has found that a bankrupt's KiwiSaver funds can be used to pay their debts, but only if trustees of the account grant access.
Law firm Chapman Tripp said the decision showed the law required "a legislative fix".
In a judgment released on March 21, Justice Ronald Young ruled that a bankrupt member's KiwiSaver account was "property" and therefore belonged to an Official Assignee - an officer of the court who administers a bankruptcy.
However he said the OA could get the money only under the same circumstances as all Kiwisaver members, such as when the bankrupt reached aged 65 or was in significant financial hardship.
Although the OA argued bankruptcy was a clear sign of financial hardship, the ruling found this was not necessarily how the law applied.
"I accept this is an unattractive result for all concerned. Legislative reform is clearly called for," Justice Young said.
The two bankrupts featured were one man with $26,254 of proven debts and no assets aside from a KiwiSaver totalling $11,860 and a second man with $9,583 of proven debt and $10,805 in KiwiSaver.
The case was brought before the court by an OA against Trustees Executors, a KiwiSaver scheme trustees.
The OA wanted a declaratory judgment to clarify what happened to someone's KiwiSaver when they were declared bankrupt.
If the trustee was not satisfied that the bankruptcy constituted significant financial hardship, the OA would have to wait until the KiwiSaver member turned 65 before gaining access to the money.
The ruling applies only to the balances existing at the time of, and accumulated during, the bankruptcy.
A Ministry of Business, Innovation and Employment spokesperson said officials were considering the impact of this decision.
The ruling was binding unless an appeal was lodged by April 22.
PwC New Zealand funds sector leader Mark Russell said that from a policy perspective it would be better if KiwiSaver was not available to creditors.
"Both in New Zealand and globally the philosophy of superannuation is that it is money that is locked away until retirement."
The decision also put trustees in a difficult position by placing extra responsibility on them.