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HMRC internal manual

Company Taxation Manual

HM Revenue & Customs
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Corporation Tax: management expenses: pension contributions: multi-employer group schemes - orphan liabilities

Where a company is a sponsor of a multi-employer pension scheme, then it may be called upon to pay contributions in respect of scheme members whose employer or former employer, being a member of the same group, is no longer a sponsor of the scheme. These members are sometimes referred to as ‘orphan members’. They may become orphan members as a result of a corporate reorganisation or disposal.

The members will be deferred members, which means that they have accrued rights in the scheme, but contributions are no longer being paid into it by them or on their behalf, nor are they yet drawing pension benefits from the scheme. They are ‘orphaned’ because their current employer is not contributing to the scheme, which may over time become under-funded in respect of their rights. This becomes an issue when one of the companies leaves the group scheme.

It can crystallise a S75 debt, which may include an apportioned amount of an orphan liability, and the employer who is leaving has to make an additional payment into the pension scheme.

Where the reason for the orphan members and associated orphan liabilities is historical, there is usually no problem in establishing that the group company now paying those liabilities (in respect of the under-funding) is doing so as part of its obligations as a sponsor of that scheme, a scheme it sponsored for the purposes of its investment business. Any such contribution will be paid in respect of its investment business.

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

The DWP’s pension regulations do permit a pension trust deed to be varied in this way (at any time) to reallocate orphan liabilities, or to reallocate liabilities relating to the past or current service of current or former employees of a particular sponsoring employer. This latter thereby creates new orphan liabilities.

If one company meets the pension liability of another, consider the facts.

The most common reason for meeting other’s liabilities is in respect of deficits on orphan liabilities for the group as a whole. It will normally be possible to establish that such a contribution is paid in respect of the paying company’s investment business due to cross guarantees (given for the purpose of the business) etc or for protecting the company’s reputation and the staff morale, particularly where the payments relate to orphan liabilities of another company rather than that other company’s current employees.

Even where payments are made in respect of another company’s current employees, the payment is not recharged, and the other company had the resources to make the payment itself, it is still possible, though less likely, that its purpose in making the payment was the protection of its reputation and it was therefore made in respect of its investment business. It would not want to be seen to be failing to fund, or contributing to an under-funding of pensions for pensioners of companies within its group or with which it is associated.

As above, for the most part contributions to orphan liabilities will be eligible for relief but consider how the liabilities arose. New orphan liabilities can be created where agreement with the pension scheme trustees reallocate liabilities in respect of current employees. At the time of the reallocation these are not orphan liabilities and the purpose of any payments made should be considered carefully.