A buyer's guide to sharesave
Interest in risk-free saving through sharesave schemes may rise as a result of new tax-saving opportunities brought about by pensions simplification, says Sonia Speedy
Change has been afoot in the sharesave market over the past 12 months, with 'consolidation' resulting in a reduction of choice for employers looking for partners to handle share scheme administration.
The Yorkshire Building Society (YBS) announced in June 2006 that it was to acquire Abbey's sharesave unit. Increasing its share of the market as a result of the deal, YBS is estimated to now control a 48% slice of the sharesave pie. The deal was swiftly followed by the merger of Mourant Equity Compensation Solutions and Halifax Employee Share Services to form HBOS Employee Equity Solutions. It currently boasts a 25% chunk of the sharesave market.
But the hottest news is that Lloyds TSB is selling subsidiary Lloyds TSB Registrars to American private equity firm, Advent International, for £550m, with the deal likely to be completed in the second half of this year. Lloyds TSB Registrars estimates its market share to be around a third.
Although the latest deal is unlikely to affect the number of players in the market, Fiona Downes, head of employee share ownership at the not-for-profit organisation ifs ProShare, says the amount of consolidation that has taken place over last 12 months means there are now fewer firms for employers to go to for sharesave administration services. However, she says that this reduction in choice has not yet had a negative effect on the market.
One of the factors driving consolidation among providers is the need for scale so that the cost of overheads, such as technology, can be borne more easily. Phil Ainsley, senior manager of employee benefits at Lloyds TSB Registrars, says: "The level of technology that you need to invest in, in order to provide the best service, is very costly."
Another issue affecting the smooth running of the sharesave market in recent years has been the introduction of the accounting standard IFRS2 by the Accounting Standards Board in 2005. Beverley Pugh, principal consultant at Mercer Human Resource Consulting, says: "Up until the time IFRS2 was introduced, options weren't required to be recognised as an expense in a firm's accounts in the UK.
"But they now are required to be reflected as an expense and therefore it has caused some organisations to review the reasons for, and returns on, the types of schemes they use in order to encourage equity ownership."
Geoff Bielby, business development manager at HBOS Employee Equity Solutions, says: "It has had the effect of making firms re-evaluate the benefits of share plans - sharesave particularly - but having done that, the majority of clients with HBOS have stayed with the plans."
Downes confirms that the change has had little effect. "The new accounting standard, which had a big impact on executive remuneration, appears to have made little difference to all-employee share schemes." Ifs ProShare's latest SAYE (Save As You Earn) survey showed that just 0.5% of companies amended their schemes as a result of it.
The survey also revealed that the recent trend for companies to cut back on the full 20% discount on the price of their shares has been stabilised with 82% now offering the maximum allowed by HM Revenue & Customs.
An issue vexing some employers is the costs associated with voluntary cancellations of sharesave contracts. Some employees will voluntarily cancel a contract to save the money for another launch they believe might be more fruitful, incurring cost for the employer as they do so.
To combat this, some employers are looking at altering scheme rules so that cancelled contracts still count towards an employees' total monthly savings limit of £250, says Downes. But while the sharesave sector, like any marketplace, has its challenges, it is continuing to hold its own.
Louise Drake, national sales manager at Yorkshire Building Society, says: "While HM Revenue & Customs reports a drop in new sharesave plan approvals, Yorkshire Building Society reports annual repeat offers are on the up with positive penetration levels evidenced."
Others suggest there is still a healthy interest in the perk. Bob Perkins, technical manager at financial advisory firm Origen, says: "It is still quite a popular means of rewarding staff and giving them the opportunity to invest back in the company.
"It rewards people in the right sort of way. It gives them the potential for financial gain, which they otherwise wouldn't have. I think there's growing interest in it, but it needs to be thought about carefully." He adds that it is a major investment decision for staff to opt for sharesave.
Perkins believes that interest in sharesave may grow as a result of new opportunities brought about by pensions tax simplification. "One of the things that we've been talking about for quite a while now is the option - when the scheme matures and you get your hands on your shares - to bypass taking the shares yourself and putting the money into a pension scheme," he says.
As long as this is done within 90 days of the options becoming due and the shares go straight from the sharesave provider to pension provider, there is no capital gains tax, he says. Bielby has also noticed an interest in this move. "Since the pension changes last year on A-Day, a number of companies have been looking at getting some information to the workforce at the end of the sharesave scheme so they are aware that they can transfer these shares into a pension plan," he says.
So while the sharesave market is seeing some change, schemes continue to promote employee productivity in a risk-free way. As Janet Cooper, global head of employee incentives at law firm Linklaters, points out, the UK is one of the few nations around the world where the government actively encourages all-employee share schemes, with sharesave and similar plans playing a vital role in redistributing wealth across the nation.
Focus on facts
What is sharesave?
Also known as Save-As-You-Earn (SAYE) or Savings-Related Share Option Schemes, sharesave is a tax-effective arrangement where employees are given the right to buy (option) shares in their employer's company at a particular time and price. Under a special SAYE savings contract operating for a period of three or five years, staff make payments each month from net salary into an independent savings account to save for the shares. There is a minimum savings amount of £5 per month and a maximum of £250 per month. A tax-free bonus is paid at the end of the savings contract. On maturity of the option, employees can take the savings or use the proceeds to take up the option in whole or in part.
What are the origins of sharesave?
Sharesave was introduced under the Finance Act 1980 and has grown into the most popular all-employee share scheme.
Where can employers get more information and advice on shareshave? The HM Revenue & Customs website contains detailed information about SAYE or Savings-Related Share Option Schemes, including draft rules and a checklists of issues to be covered. See http://www.hmrc.gov.uk/shareschemes/savings.htm
Not-for-profit organisation ifs ProShare also offers information at www.ifsProShare.org
What is the annual spend on sharesave?
According to ifs ProShare figures for 2006, there were 2.5m employees participating in sharesave schemes in the UK and the average monthly saving per employee was £66.35.
Which sharesave providers have the biggest market share?
Currently the top three market players are considered to be Yorkshire Building Society, HBOS Employee Equity Solutions and Lloyds TSB Registrars.
Which sharesave providers increased their share the most over the past year?
Consolidation has played a significant role in growing market share. It is estimated that Yorkshire Building Society, after acquiring the Abbey sharesave business in 2006, now controls around 48% of the market. Also in 2006, Halifax Employee Share Services merged with Mourant Equity Compensation Solutions to form HBOS Employee Equity Solutions. It claims 25% of the sharesave market, while Lloyds TSB Registrars boasts a third.
Nuts and bolts
What are the costs involved?
The costs vary greatly depending on how big the scheme is and how it is set up. However, employers will incur the costs associated with the legal and financial advice necessary to put the correct documentation in place for a scheme, along with the costs of communicating the scheme to employees. Some schemes may also incur a charge from the savings provider managing the savings. The International Association of Financial Participation is currently seeking funding from the European Union to look into the costs associated with employee share plans.
What are the legal implications?
Employers would normally take legal advice to ensure that the scheme rules are drawn up correctly. Share options need to be held in a UK company.
What are the tax issues?
Employers have to seek approval from HM Revenue & Customs to qualify to offer employees a discount of up to 20% on the market share price and to benefit from corporation tax deductions in connection with the scheme. If the scheme complies, employees pay neither income tax nor national insurance contributions (NIC) on the gains they make on their share options. Capital gains tax (CGT) may be due when the shares are sold however, although this can be mitigated by transferring shares to a spouse, putting the shares into an Individual Savings Account or registered pension plan such as a self-invested personal pension (Sipp).