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HMRC internal manual

Business Income Manual

HM Revenue & Customs
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Specific deductions: pension schemes: wholly & exclusively: orphan liabilities/deferred members

S199 Finance Act 2004, S75 Pensions Act 1995

Where a company is a member of a group pension scheme, then it may be called upon to pay contributions in respect of scheme members (orphans) whose employers are no longer sponsors of the scheme. This may occur by default, for historical reasons arising from group reorganisations, disposals and cessations. Where the employer acquired responsibility for the orphan pension liability for historical reasons, the most likely explanation for taking the liability on is that it was part of its obligations as one of the employers for the scheme, and the purpose for entering into the scheme was wholly and exclusively for the purposes of its trade.

The members concerned will generally be ’deferred members’, meaning that they have accrued rights in the scheme, but contributions are no longer being paid into it by them or on their behalf, nor have they yet begun to draw pension benefits from the scheme. They are ‘orphaned’ because their current employer is not contributing to the scheme, which may over time become underfunded in respect of their rights. This is most commonly an issue when one company leaves the group. This can crystallise a liability under S75 Pensions Act 1995 (see BIM46045), which may include an apportioned amount of orphan liability, and the leaving employer becomes liable to make an additional payment into the pension scheme.

However it may instead be the case that a group, in agreement with the pension trustees decides to reallocate liabilities for pension scheme beneficiaries between the various sponsoring employers of the scheme. As a result of reallocating some or all liabilities, it may be that no S75 debt arises when, upon disposal by the group, an employer company subsequently leaves the group scheme.

The pension regulations permit a pension trust deed to be varied to reallocate in this manner, at any time, allowing not only orphan liabilities to be transferred but also liabilities relating to the past service of current or former employees of a particular sponsoring employer. In the latter case it will be apparent that the reallocation of liabilities relating to current and former employees of a company, which is a sponsoring employer for the scheme at the time of the reallocation, but is afterwards sold, is in effect creating new orphan liabilities.

Wholly and exclusively

  • If one company is meeting the pension liability of another company then you will need to consider the reasons for this. It does not necessarily follow that in doing so it has a non-trade purpose, indeed it will be rare for a pension payment to be other than wholly and exclusively for the purposes of the paying company’s trade.
  • The most common situation whereby one company meets the pension liability of another is a specific payment relating to pension fund deficits comprising orphan liabilities relating to the group as a whole. It will commonly do so solely for the purposes of its trade as a consequence of cross-guarantees it has made to other employers of the scheme or for the reputation and morale purposes cited above. The fact that the liability relates to orphan liabilities of another company rather than the pension liabilities relating to current employees of that other company would normally support the reputation purpose.
  • Where exceptionally a company makes a payment in respect of another company’s own current employees and scheme members without recharging the cost and that employing company was in a position to make the payment itself, you will need to consider what the paying company’s purpose was in making the payment. However, even in these less clear cut cases it is important to keep in mind potential damage to reputation for a company seen to be failing to fund properly the pensions for pensioners related to it or its group or associates. Further guidance on this issue is at BIM46065.

Establish how the orphan liability was created

  • While a payment to address a scheme deficit relating to orphan liabilities is normally wholly and exclusively for the purposes of the trade, whether or not paid by the direct trade to which the liabilities attach, you should establish as fact how the orphan liabilities came into being. The vast majority of liabilities in respect of deferred members occur by default, for historical reasons arising from group reorganisations, disposals and cessations.
  • However in some cases a multi-employer scheme can create new orphan liabilities by agreeing with the pension scheme trustees to reallocate current employee pension liabilities. It follows that these liabilities although potentially described as orphan liabilities are at the time of reallocation akin to liabilities relating to current employees of another company. In establishing whether any subsequent payment is wholly and exclusively for the purposes of the paying company’s trade you will need to consider the purpose behind the transfer of liabilities, particularly when the timescale between the two events indicates they are related.


Company A decided, solely in the interests of its trade, to take part in the group registered pension scheme. Some years later, Company A is the subject of a management buy-out. As a result of this it is decided that Company A will cease to take part in the group registered pension scheme. This results in Company A having to pay additional sums into the pension scheme as its S75 debt crystallises. Company A’s S75 debt includes £250,000 in respect of its share of orphan liabilities for people who were employed by other companies which have since been wound up.

Company A can make a deduction for the sum as the purpose of making the payment was wholly and exclusively that of its trade. Company A chose to enter the scheme wholly and exclusively for the purposes of its trade. The benefit to the employees of the former group companies is an incidental benefit that arises as a consequence of statute. The cost is an allowable expense of Company A’s trade.