Employees share City jitters

Published on Sunday 26 August 2007 00:56

MILLIONS of workers across the UK, everyone from supermarket checkout assistants and bank clerks to bus drivers, will have been watching the stock market turmoil of the last month with a growing sense of apprehension.

Over the past 30 years, staff at many big institutions have been quietly saving via their company's tax-free share plans, closely interweaving their fortunes, and those of their families, with those of their employer's share price.

At one point, for example, HBOS shares plummeted to 8.44, within a whisker of the 8.49 exercise price of the latest employee share save scheme, but has since bounced up, closing on Friday at 8.85.

Yorkshire Building Society (YBS), which administers 53% of all employee share plans, admitted some were now "underwater" after bumpy markets.

But tens of thousands have been left quids-in so far this year. About 1,500 employees at bus and train company First Group received 4m when a five-year Save As You Earn (SAYE) plan they had contributed to matured, while 50,000 Tesco staff banked 150m when their plans matured in February. Some 6,000 of them received 7,000, a 120% return. Similarly 8,000 workers at rival supermarket group Sainsbury's received an average of 2,875 when their three and five-year plans matured in March.

Unsurprisingly, given these well-publicised returns, uptake of employee share schemes is increasing. Sainsbury's saw employee uptake increase 38% last year.

Now, however, the 2.5 million workers paying into SAYE schemes throughout the UK may be anxiously wondering if the heady profits that have been seen in recent years are a thing of the past.

First things first

To understand how SAYE plans are impacted by share prices, investors must first understand how they work.

Employees save between 5 and 250 each month, for either three, five or seven years. The employer deducts this sum from their salary.

On maturity, employees get back the amount they have saved plus interest. They can use some, or all, of this nest egg to buy shares in the company they work for, at a predetermined price set when the scheme is launched. This is normally a discount of 20% of stock price at outset.

However, if the exercise price is higher than the shares are trading at maturity, staff can always opt to take cash plus interest instead.

The longer a plan runs, the greater the likelihood that the share price will have risen over its lifetime. However, these schemes can be left underwater after sharp market reversals.

For example, after the technology bubble burst, around half of all the schemes matured with the exercise price higher than the price being traded in the market at that point. Similarly, after the 1987 crash many staff opted for the cash.

If your plan is underwater

If the share price of an employer is below that of the SAYE offer price when the plan has run to term, an employee has two options.

Firstly there is a grace period of six months, in which an employee can wait to see if the share price recovers before deciding whether or not to opt to take their SAYE in shares. If the company's share price rose above the option price in that time, the employee would still be able to buy shares at the option price and sell for a profit.

Secondly, if the share price does not recover, or the employee cannot wait six months, they can take their savings, plus interest, as a cash lump sum.

The interest rates for three, five and seven-year plans are set by the Treasury. The rates applying to plans started after September 1, 2007, are, 4.23%, 4.48% and 4.46% respectively.

Employees opting to cash in their shares should note that capital gains tax will be payable on gains of more than 9,200 in this tax year.

Garry Milner, share plan operations manager at YBS, said employees should not rule out simply taking the cash and the bonus. He said: "Because of the nature of the stock market there are always some schemes underwater when they mature. This is a very small percentage of the total schemes in operation and we haven't seen any increase in underwater schemes in recent maturities.

"Employees don't, however, lose out, because they can choose either to wait six months to see if the share price increases or take all their savings with the tax-free bonus."

Bank of Scotland, Royal Bank of Scotland and Lloyds TSB Scotland all confirmed that despite the recent market storms, all their schemes were currently above water. YBS also pointed out that a lot of the plans maturing this year had commenced at around the time the stock market bottomed-out in 2003, and so companies' share prices are for the most part sitting considerably higher than when plans commenced.

Employees who buy shares can transfer them into an individual savings account (Isa) to continue tax-free growth. This year up to 7,000 worth of shares can be transferred. However, anyone wishing to transfer shares earned under a share save scheme into an Isa must do so within 90 days of buying their shares.

Those who want to check on the prospects of their SAYE can use the calculator on the YBS website. The calculator allows people to put in the option price of their shares and it will predict the expected price when the scheme matures.

Share Incentive Plans

In 2000, the then Chancellor, Gordon Brown, introduced a second type of employee share plan, the Share Incentive Plan (SIP). There are three strands to SIPs: employers can give up to 3,000 worth of free shares per annum to employees free of income tax and National Insurance; employees can buy so-called partnership shares from their pre-tax salary subject to certain limits, again free of income tax and NI; and, employers can also give employees up to two free shares for each partnership share the employee buys.

Research by ifs ProShare, the share ownership body, revealed that rather than offering either SAYE or SIP, the vast majority of employers offer both, allowing employees to doubly benefit if they wish. In 2006, the average sum contributed to a SAYE plan was 61, while the average SIP contribution was 73.

HBOS is typical of the vast majority of employers offering the first type of SIP plan, in that it gives free shares worth the maximum of 20% of an employee's salary. This meant that in February 2007 some 50,000 staff collectively gained 120m after shares they were allocated in a plan commencing in 2004 matured. Ifs ProShare also found that more than one fifth of employers matched shares bought by their employees in SIP plans on a two-for-one basis, and an additional 34% matched on a one-for-one basis.

Stock market volatility is less of an issue with SIP plans, especially where shares are given free, or matched, as employees are effectively getting something for nothing in the first place. Once plans mature, the employee can always opt to hold onto their shares in the hope that share prices will rise again.

My plans fund home improvements and holidays

LISA Stirling, a paralegal at Bank of Scotland in Edinburgh, has been using her company's Sharesave scheme as her main form of saving for the past two decades. In that time her maturing plans have paid for overseas holidays, while this year's will be spent doing up her new home.

Lisa says: "I began working for the bank 22 years ago and I started Save As You Earn as soon as I could, way back in my twenties. I think you had to have worked for the Bank for a year before you could join and they were really well explained."

Indeed the plans were outlined in such a way that they captured her imagination at a time in her life when, the majority of research suggests, her peers would have been doing anything with their money rather than saving. She says: "I wasn't saving another way and it seemed like a pretty good deal at the time. As it turned out, it was."

Lisa pays 250 into her current five-year plan each month, and now has her plans structured so that one matures every year. Having been saving for 20 years, the plans have matured through highs and lows of the UK stock market and she admits to some close watching of her employer's share price at times of market upheaval.

That said, to date the share price on Stirling's plans at maturity has always been higher than the option price. She said: "I have always taken the shares and, touch wood, so far they have always done well. I keep the [matured] shares in my share dealing account until I need to sell them, and over the years they have paid for big holidays in Australia and Mexico, which I would not have been able to go on otherwise.

"I have just bought a house in Murrayfield which needs a lot doing to it, so I am going to be using this year's shares to get alterations and work done."