Modern businesses know the importance of risk-management to maximise the upside and minimise the downside but employees rarely think the same way when running their own finances. While keen to sign-up to share plans and to maximise the tax advantages, far less attention is given to the eventual exit strategy.
Millions of people are using share plans to build a stake in the companies they work for, gaining not just a potential source of extra wealth but also a doorway into the world of investing. For many, it will be their first foray into the ups and downs of share ownership.
Under HMRC rules, tax-advantaged share plans must be offered to all eligible employees. Many companies listed on the stock market offer Save As You Earn (SAYE or “Sharesave”) schemes or Share Incentive Plans (SIPs), and sometimes both.
With our experience of running employee share plans for many of Britain’s biggest companies, we see significant numbers of participants who are keen to engage but less clear about how best to disengage.
With Sharesave, for example, when plans mature, around half of the participants will typically exercise their option to buy the shares then immediately sell them and pocket the cash. About one in 10 will make an active decision to transfer the shares, typically to a tax-efficient wrapper such as an ISA or pension or perhaps into the name of a spouse.
That still leaves up to 40 per cent of participants holding onto their shares. Why is this? They may have no immediate need for the money and little knowledge or interest in investing elsewhere. Selling may feel disloyal, or inertia may lead them to do nothing rather than risk making a bad choice. In many cases, they will tuck the paperwork away and continue investing in ongoing share plans – up to £500 a month into Sharesave or £1,800 a year into SIPs – building ever larger stakes.
This may seem shrewd but actually flies in the face of investment orthodoxy. Rather than diversifying across assets to spread risk, building a bigger stake concentrates it. One major setback for the employer could lead to the double-whammy of people fearing for both their jobs and the value of their nest-eggs. And as the business news pages remind us on a daily basis, even the biggest businesses are not immune to external events or self-inflicted disaster.
Across our clients we see a rising number of share plan members who have accumulated holdings worth five and in some cases six-figures.
This creates a dilemma for employers who want to see employees reaping maximum benefit from share plans but can’t be seen advocating that their own staff offload shares at the first opportunity.
There is a bigger picture here. Increasingly providers of employee benefits are focusing on delivering services to companies that support financial well-being among staff, not just products or services but the information and context to encourage good decision-making.
Different benefits are designed to meet different needs and while staff find it easy to understand what childcare vouchers, medical insurance and other benefits can do for them, share schemes are not so simple. That means that internal communications needs to be crystal clear not just on how to sign up, but also on what a good exit strategy might look like.
Employers need to be clear that participation is enough to reap the benefits while showing loyalty, but that over the longer term there are advantages to switching tax wrappers and diversifying across asset classes.
There are useful general rules that can help too, such as limiting the amount tied up in any one investment to not more than 10 per cent of overall wealth. Today we are used to checking our bank statements on a weekly or even daily basis and making instant transactions online or via mobile. Most employees can access their share plan details in the same way, but rarely do so. That needs to change. Companies must work to promote information and insight at the time and in the format that works best, helping to support financial well-being across the whole workforce.
If you'd like to know more about this subject, please contact your Equiniti relationship manager.