BIM46055 - Specific deductions:
registered pension schemes: wholly & exclusively: orphan
liabilities/deferred members
Orphan liabilities
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 Section 75 Pensions Act 1995, 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 Section 75 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. The majority of such
liabilities also relate primarily to deficits arising before the
new pensions legislation as it applies from April 2004.
- 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.
