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In the middle of some of the worst stock market downturns in memory thousands of workers have shared millions of pounds in profits from investing in shares. Their secret was to have joined employee share-saving schemes.
These schemes are an unobtrusive benefit, a form of profit-sharing for employ ees, which have been around for more than 20 years. Profits are not guaranteed, but the schemes operate in a way that cuts the risk of getting burnt in the stock market. Nearly all the FTSE 100 companies have the scheme, among them big names such as Tesco, Abbey National, United Utilities, Diageo and Asda.
There are around 2 million participants in the 1,200 'live' share schemes, says ProShare, a group that promotes share education.
The idea behind a share scheme, a child of the Thatcherite era, was to promote loyalty among employees and to give them an incentive to help boost their company's profits. To ensure that nothing went wrong, the Government gave generous subsidies in the form of tax breaks, and companies were encouraged to be generous too.
Research, says ProShare, shows that these goals have been reached, though there are plenty of companies that don't yet run schemes and a few whose staff have lost money.
The point about share schemes is that they are usually pretty good to the employee. If he or she buys options in a Sharesave scheme (usually staff can join after clocking up six months employment), they don't have to worry if the company shares yo-yo or droop.
An employee buys the shares at a generous discount, takes a tax-free bonus and ends up with a decent stash of cash. Many decide to set up an equity Isa (Individual Savings Account), reduce their mortgage, add to their pension fund, or hop aboard a world cruise.
ProShare's Richard Margrave says the newer schemes, such as Sips (see below) introduced in 2000, haven't taken off quite as quickly as hoped. The muted response is partly due to the bear market which put everyone off share-buying.
Two Sharesave schemes for Halifax bank staff matured last year, producing £31m of gains for about 10,000 employees.
Gill Hannan, head of Sharesave at the Halifax, says: 'It's the flexibility that makes it so appealing for employees and also they can't lose out.'
A small change last September 2003 means that bonus rates for new schemes are now expected to reflect the general interest rate market, says the Government. So far this hasn't changed the status quo, with the bonus declining only a little.
A more worrying aspect for share schemes is that the International Accounting Standard Board wants global uniformity over accounting for them. It wants them to be put directly through a firm's profit and loss account so that, for the first time, they show up on the balance sheet as a cost. So there is concern that, if this happens, companies may chip away at the schemes' advantages.
The schemes
The Sharesave Scheme was introduced in 1980 and is tried and tested. It is the most widely used plan, especially among big quoted companies. This is because there is little risk to the investor (short of the com pany going bust), who can buy options on his company's shares for £5 to £250 a month from net income. The average save is about £68 a month.
Once investors choose to cash in their options they receive a tax-free bonus - a multiple of what they have put in - of about 2 per cent over a five-year span. They can also buy shares at a discount of about 20 per cent to the market value.
There may be a capital gains tax liability when the shares are eventually sold, but with planning this can be minimised.
Share Incentive Plans (Sips) were introduced by Chancellor Gordon Brown in 2000 for private companies with fewer than 250 employees.
Sips are better attuned to the more sophisticated investor, especially the higher-rate taxpayer, who takes the greater risk. This risk centres around the fact that the scheme requires employees actually to buy the shares, as opposed to taking out low-risk share options. So it is not dissimilar to buying the same shares on the stock market. But there are the tax-free benefits as well as the chance to invest gross salary into the scheme.
Nearly half of Sips schemes - but not the Sharesave ones - give their employee investors up to £3,000 a year worth of 'free' shares, though these must be held for three years.
A perk of the riskier Sips are 'partnership' shares: employees can use up to £1,500 a year out of their pre-tax and pre-National Insurance pay to buy 'partnership' shares.
Sips can reduce the danger of shares falling in value by offering free 'matching' shares, where workers can collect one or two 'matching' shares for each 'partnership' share they have bought. There are other specialised share schemes.
If you feel your firm should know more, contact ProShare (tel: 020 7220 1730).
Case studies
· Neil Wood, 30, a Halifax project manager, is
delighted with his three years in one of its shares
schemes, and his profit makes him feel positive
about the company.
'I have saved ?125 a month. When I started the
shares were worth ?4.10. They are now selling at
about ?7. If I cashed in my share options now I
would receive ?8,267 which includes my tax-free
bonus,' Wood says.
'I have six months to decide what to do. I am
waiting for the shares to reach ?8 when I will
have doubled my money.' Wood, who has worked
for the bank, now part of the HBOS group, for 13
years, adds: 'I would recommend this scheme to
anyone. You don't pay income tax on the interest
you receive from your savings, you get to buy the
shares at a 20 per cent discount. I've just set up a
new one.'
Woods's partner, Jackie, a fellow Halifax project
manager, is to collect her investment this year,
and she should take home a similar amount.
What will they do with the money? 'Reinvest a lot
of it, and the house needs attention,' he says.
· Graham Masters works for Cambridgeshire
label printer Burall, whose family owners began
to use a share ownership scheme in l998 to hand
over 75 per cent of the shares in the firm to its 330
staff.
Burall has Sharesave and Sips schemes. 'We are
not a co-op or a management buyout,' says
Graham Masters, 50, who runs them both. 'We are
still run by a board of directors, but the
employees have an ultimate weapon if they feel
the directors are not delivering.
'However, it hasn't been easy keeping employees
interested during the stock market slump. But if
someone under our Sips partnership scheme
bought a ?1 share and then took up his free share,
he would only have spent 50p each, which cuts
the pain if the value falls'. He has invested in both
schemes and has lost money so far on his Sips,
but he hopes Burall shares will recover by the
time the five-year scheme ends.
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