EIM15072 | Employer-financed retirement benefits schemes: arrangements for providing security for payment of benefits in future

Section 307 ITEPA

To provide benefits under an employer-financed retirement benefits scheme (EFRBS), 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, for example, 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. Following the repeal of section 386 ITEPA 2003 and the introduction of the EFRBS rules on 6 April 2006, there was no charge on an employee in respect of any employer contribution until the Part 7A ITEPA 2003 rules were introduced on 6 April 2011 (see EIM15010).

There is normally no charge under the benefits code in respect of any provision of security because section 307 ITEPA 2003 exempts it (see EIM21800). However, section 307(1A) provides that if an employer pays premiums for an insurance policy to insure against the risk that benefits cannot be paid because of insolvency, then the cost of those premiums is not covered by the exemption and may be taxable as a benefit in kind on the employee.

From 6 April 2011 charges can arise on the employee in connection with their employer making contributions, most often on earmarking of the contribution in the scheme as being for the employee (see EIM15060), but it can also happen upon the provision of security as above (see relevant undertakings at EIM45140).