EIM15052 - Non-approved and employer-financed retirement benefits schemes: arrangements for providing security for payment of benefits in the future

Section 386 ITEPA 2003, Section 248 and 307 ITEPA 2003

To provide benefits under a non-approved or employer-financed retirement benefits scheme, an employer may make contributions to an independent trust set up for the purpose. But an employer may simply promise to make retirement or death benefits when the time comes.

In the latter case, employees often require some form of security to reassure them that the promise will be met. This can be done in a variety of ways, but there is no charge under Section 386 ITEPA 2003 (employer contributions to a non-approved scheme) when this is done. To achieve this the employer may:

• execute a legal charge over specific business assets. This means that if the employer goes into liquidation, those assets will be realised firstly to meet the benefits promise
• execute a legal charge generally over all business assets. This means that if the employer goes into liquidation, satisfying the benefits promise will take first call on those assets
• acquire assets sufficient to meet the accrued liability. An actuary calculates how much an employee would need to be given at any particular time to enable the employee to invest and provide the pension promised by the employer. Assets acquired cover that amount.

The common feature of all these arrangements is that they are put in place solely to provide the employee with security or reassurance that the employer's promise will be met. So if there is an intention from the outset to use those assets to fund or pay for the retirement benefits then a charge under Section 386 ITEPA 2003 will arise where the contribution is made prior to 6 April 2006 (see EIM15040). Section 386 is repealed with effect from that date, so there can be no charge in respect of a contribution after 5 April 2006 in any event.

Before 6 April 2006, there is no charge under the benefits code in respect of any provision of security because Section 307 ITEPA 2003 exempts it (see EIM21800). However, from that date, Section 248 FA 2004 amended Section 307 so that the cost of insuring against the employer’s insolvency is no longer within that exemption.