27 June 2018 by Gabbi Stopp
Amid stagnating take-up rates for employee share plans, change is required to increase their relevance and effectiveness
ProShare has been publishing its annual report on the all-employee share plans market in the UK for more than 10 years. It focuses on the largest UK tax-advantaged schemes: the Save As You Earn (SAYE) scheme and the Share Incentive Plan (SIP).
In the 2017 survey, 421 companies’ SAYE schemes were included and 412 of these companies had ‘live’ schemes (active savings accounts with live options). 19 companies had open savings accounts but no live options. Overall, 417 companies’ SIPs were included in the survey.
According to the latest available statistics from the Office for National Statistics (ONS) on behalf of HMRC (for the tax year 2015–16), there were 520 SAYE schemes and 800 SIPs in existence in the UK.
“For many people, employee share plans remain the only practical route to owning shares and benefitting financially ”
We believe these numbers are slightly inflated by the presence of a number of schemes misregistered via ERS Online, HMRC’s online portal for the registration and reporting of tax-advantaged and non-tax-advantaged schemes operating in the UK. The SAYE and SIP surveys capture all of the schemes administered by the UK’s largest share plan administrators.
As this year marks the 100th anniversary of female suffrage, as well as the first round of reporting under the new Gender Pay Gap Reporting Regulations for employers with 250 or more UK employees, it felt appropriate to introduce some gender-related survey questions. These covered employee eligibility, participation in and contributions to SAYE and SIP, and asked participating plan administrators to provide gender-related breakdowns within their anonymised data – although not all were able to provide this data in this first year of asking.
SAYE is a tax-advantaged, all-employee share scheme. It was first introduced in the Finance Act of 1980 and its tax advantages are set out in Schedule 3 to the Income Tax (Earnings and Pensions) Act (ITEPA) 2003.
Under SAYE, eligible employees are offered the right to buy a certain number of shares in the company at a future date at a pre-agreed purchase price or ‘option price’. The option price may be calculated at up to a 20% discount on the market price of the company’s shares at the start of the scheme.
Participating employees are required to save a fixed amount of their choosing between £5 and £500 on a monthly basis via payroll for a three or five-year term. The proceeds of this savings contract are then used to buy the shares at the option price.
Currently, participants are able to suspend their monthly contributions for up to six months (this will rise to 12 months from 1 September 2018). Participants may also withdraw their savings at any time, but if they choose to do so, their option to buy shares at the option price will lapse.
SAYE key findings
The Share Incentive Plan (SIP) is a tax-advantaged plan, first introduced via the Finance Act of 2000. SIP’s tax advantages are set out in Schedule 2 of ITEPA 2003.
The legislation allows companies to offer up to four different types of shares to employees. ‘Freeshares’ allow employers to give each eligible employee shares worth up to £3,600 each tax year, free of income tax and National Insurance. ‘Partnership shares’ mean employees can purchase up to £1,800 (or 10% of salary, whichever is the lower) of shares each tax year from their pre-income tax and NIC pay. ‘Matching shares’ allow employers to award free shares to employees in proportion to their partnership shares purchased; the maximum ratio permitted is two matching shares for every one partnership share.
Finally, employers can offer employees the opportunity to reinvest any dividends received on their SIP shareholding into ‘dividend shares’ on a voluntary or mandatory basis.
SIP key findings
SAYE and later SIP were originally created – alongside other measures – as ways of democratising share ownership in the UK, sharing wealth and putting capital into broader ownership. For many people, employee share plans remain the only practical route to owning shares – capital – and benefitting financially from ownership.
Both SAYE and SIP have stood the test of time so far, but our evidence of stagnating contribution and take-up rates strongly suggests that some changes are required in order to preserve and enhance their relevance and effectiveness.
One of ProShare’s long-held policy change objectives is to eliminate the five-year holding period in SIP, retaining a simpler and easier to understand three-year holding period. The majority of participants in our recent research ‘Attitudes to Employee Share Ownership’ were vastly in favour of a shorter and simpler SIP holding period, regardless of whether they were currently participating in a plan or not.
Furthermore, 38% of our non-SIP participating research respondents said they would be more likely to join the SIP if it had a shorter holding period. 24% said they did not join their company’s SIP because they did not think they would be with the company long enough to benefit from it.
The five-year SIP holding period no longer matches up to average employee expectations or tenure and, far from encouraging retention, engagement and loyalty as originally designed, it now puts people off from joining and benefitting from the SIP in the first place. There is clear support for a three-year SIP holding period across the share plans industry and from employers and employees.
ProShare is working hard to evidence the impact of this potential change and to obtain the support of policy makers for it.
Although not all administrators were able to provide gendered data, of those that did, we observed higher take-up and contribution rates for male employees than for their female colleagues in both SAYE and SIP.
For example, the average value of SIP shareholdings at the end of 2017 for women was £6,006, whereas for men it was £7,460. It should be borne in mind that many free share awards are worked out as a percentage of annual salary. If women are more predominantly employed in less senior, lower-paid, possibly part-time roles, then it follows the average value of their free share awards will be lower than those of their male colleagues. Female employees on lower pay will also be less able to afford to contribute to SAYE or to SIP partnership shares at the same rate as higher-paid male employees.
Let us be clear: neither SAYE nor SIP are discriminatory. Companies are required, if they choose to offer SAYE or SIP, to offer the scheme(s) to all eligible employees and on exactly the same terms to each eligible employee. These requirements are enshrined in statute and failure to comply with
them would put at risk the scheme’s tax advantages for both employee and employer.
The differences that we have uncovered are ‘downstream’ effects of the gender pay gap, which itself owes far less to unequal pay (which is illegal under the Equal Pay Act 1970) and far more to differences in women’s ability to access and/or remain in more senior, higher-paid roles in the workplace relative to their male peers.
It is clear from our findings that many of the perfectly legitimate design features of contributory share plans – requiring employee contributions from net or gross pay or being calculated on a percentage of salary – unintentionally ‘hard-code’ pay differences into the level and value of share plan benefits enjoyed by female versus male participants.
If we are to fully understand the impact of the gender pay gap and put in place the most effective countermeasures, it is important to shine a light upon these downstream effects.