Share schemes are an option but don't bank on a windfall

TESCO employees will this weekend be celebrating doubling their money after their employee share save scheme matured, paying out free windfalls of up to 3,000 each.

More than 55,000 staff, including 5,029 in Scotland, share the 144 million giveaway, after Tesco's share price remained resilient, closing on Friday at 410.75p, despite recent turmoil in the stock market.

Share save schemes celebrate their 30th anniversary this year, during which time millions of employees have enjoyed significant financial gains from small regular savings used to buy their company's shares at a discount.

But they have not always been a one-way success story. Some of those who benefited most at first were bank staff. However, if they hung on to their shares, as many did, the gains would have been more than wiped out in the recent banking collapses, sometimes taking all their savings with them.

HM Revenue & Customs rules allow staff to save between 5 and 250 monthly for three or five years, although the maximum Tesco monthly contribution is 50. At the end of the term, they can chose to either take their savings plus a tax-free bonus in cash, or use the amount saved to buy Tesco shares.

The price at which staff can exercise the option is set at the outset and is normally 20 per cent below the prevailing share price.

At Tesco, some 9,000 staff, who made the maximum 50 contribution over five years, will have built up a nest egg of 3,000, which they can use to realise a further 3,000 by buying shares at the option price set five years ago of 2.32 and selling them at today's price of nearly double that.

But even if the shares had crashed staff would not have lost out. If the share price at maturity is lower than the option price then the employee can choose to cash in their saving plus a bonus based on a modest interest rate.

For example, the current bonus on the three-year scheme is 0.3 per cent of monthly payments, or 0.54 per cent annual interest. Five-year bonuses are 2.2 per cent of monthly payments or 1.42 per cent annual interest.

Finally, there is a seven-year option whereby contributions stop after five years, but the investment can remain intact and accruing interest for a further two years. This works out at 5.2 times the contributions, or an equivalent annual rate of 1.84 per cent. This can then be exchanged for shares, potentially locking in a seven-year capital gain.

The schemes have remained popular with staff despite the stock market's recent rollercoaster performance. Some of the schemes launched three or four years ago might not look that attractive any more. But many companies have continued to launch new schemes during the stock-market crash, allowing staff to cash in on some very low option prices.

In such cases it may be worth employees leaving their existing schemes, and switching the funds, via higher contributions, to the new plan.

Jill Evans, of Yorkshire Building Society, which administers a large number of share save schemes, says it has seen a surge in new investments over the past year, although much of this is churn.

"When share prices were low, companies brought out new share schemes with a lower option price than those running at the time. Obviously it makes sense from an employee's perspective to cancel the scheme they are currently paying into and opt into the one with the lower option price.

"This is what we have been seeing, but the good thing is savers have been increasing their monthly contributions at the same time."

If employees need to leave early, they can have their money back but during the first year that is all they get. After that they will be paid interest.

Where schemes do well, and share prices double, as with Tesco staff, savers injecting the maximum 250 monthly contributions could end up with lump sums worth more than 30,000.

Gains on the shares are subject to capital gains tax, currently 18 per cent, although only if they exceed 10,100 in this tax year. CGT can be further mitigated by buying the shares in an Isa.

Nasty shock when power worker ticked wrong box

IF A dispute arises between a company and employee, staff can be left high and dry, as former Scottish Power employee Richard Anderson discovered to his cost. There are no appeals procedures, as with other investments, so there is nowhere to turn for help, short of taking legal action.

It can make for a bruising introduction to the world of investments for financially unsophisticated staff, as happened to Richard from Eaglesham.

Confronted with a complicated form and 15-page share document, he ticked the wrong box when trying to exercise his options. As the company was going through the takeover with Iberdrola, the documentation was unusually complex, involving loan notes, fractions of shares, special dividends cash top-ups and a bewildering web of dates.

But his confusion led Scottish Power to refuse him any shares at all, thereby short-changing him of about 3,000 he believed he was owed. Only when the call centre employee engaged a lawyer did Scottish Power offer to pay anything at all, although still less than Richard was counting on.

The case raises questions about the duty of care employers owe to staff to help them through these confusing transactions.

If a similar dispute had arisen with a different kind of investment, Richard is likely to have received a sympathetic hearing.

A spokesman for the Financial Ombudsman, where such disputes typically end up, said: "Where an investor has clearly made an inappropriate decision which has left them worse off financially, we take into account how sophisticated and experienced they were."

Richard signed up for the Scottish Power employee share ownership scheme when he joined the company in 2005, paying in a total of 2,031 by the time Iberdrola formally made its offer to take over the firm in April 2007.

Richard's uncle, Tom Dougan, of Fife, takes up the tale: "The employees were offered the chance to exercise their shares before the takeover called 'exercising early'. In this case the form had to be received by 12 April. Alternatively, they could wait until after October, when the bid actually went through, when they could exercise a further six-months' savings and also stood to get a top-up cash bonus from Iberdrola. Most staff waited until after the October deadline, because they would be much better off doing so."

Richard opted to wait so did nothing with the form, until in September, he decided to leave the company for another job. He was fully aware that he needed to exercise his options before his departure. The form made it clear that if you chose to exercise your options when you were no longer an employee, then you lost all entitlement to the shares.

So he got out the form and studied the three option boxes. The first box said to tick here if you wanted to "exercise early", the second said tick here to "exercise later" and the third said tick here to "exercise at some other time"

Richard ticked the second box on the basis that he wished to exercise the option after April, which he interpreted as "exercise later". However, this was a mistake. He should have ticked the third box, and inserted a specific date. Had he read the small print carefully, he would have realised that the second box was for those who wished to exercise after October, by which time he would no longer have been an employee, and had no rights to the shares.

The problem was compounded because he posted the form in the pre-paid envelope provided, addressed to the administrator, HBOS Employee Equity Solutions, using Scottish Power's internal mail system. When he heard nothing, he contacted the company to be told the form had never arrived, and as he was no longer an employee his options had been confiscated.

There followed a row which dragged on for two years Only once lawyers were involved did Scottish Power make an offer of compensation. But it was an ex-gratia payment, not based on the value of his options when he left the company. In doing so, Richard believes he was short-changed by about 1,000, leaving him 1,700 out of pocket when 700 legal fees are included.

A ScottishPower spokesperson said: "The form submitted by Mr Anderson shows that he had no legal right to exercise the share option because he resigned prior to the date that he had elected to exercise the option. We need to be fair to all participants and it is only right that we adhere to the relevant Share Scheme rules. All participants were provided with a detailed document clearly outlining all the options that were available to them.

"We have, however, been more than reasonable in considering Mr Anderson's situation. On top of paying back the contributions that he made, and was always entitled to, we have also offered a further substantial payment that would represent a 125 per cent return on his investment. This offer has been made on a without prejudice basis and is entirely based on a sympathetic view of Mr Anderson's circumstances."

Sharesave schemes are outside the remit of the Financial Ombudsman and neither are they regulated by the Financial Services Authority.

However, where the underlying administration is run by regulated firms, it might be possible to bring a dispute to the attention of the Financial Ombudsman. HBOS is a regulated firm, so it might have been worth pursuing the complaint against the plan manager. However, Richard left Scotland last weekend to begin a new life in New Zealand.