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Share scheme sums

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John Greenwood - Greenwood's view
One issue coming out of the Northern Rock debacle that should serve as a warning to advisers and employers is the risks inherent within employee share plans.

This month, redundancy-threatened Northern Rock staff are being told they could face a double whammy of not only losing their jobs but also seeing up to 10 years of savings, worth thousands of pounds, disappear. I wonder what level of explanation of risk and diversification these people truly took on board when they joined the scheme.

The company's HR department is going through the process of explaining the process for the selection for redundancy of around a third of the staff and also what nationalisation means for the millions of pounds tied up in its employee share plans.

A year ago, shares distributed to staff through Northern Rock's employee share schemes over the last 10 years were worth £80m when the company's share price stood at over £11. On the day in February when Northern Rock was nationalised, they closed at just 78.5p and today employees are in the same position as other shareholders, hoping the Government will give at least something for their now obsolete share certificates. There is a chance that they will get nothing.

But unlike most of the firm's other shareholders, for many Northern Rock employees, these are the only shares they have ever owned.

SAYE is perhaps unique in financial services as the only one-way bet on the stockmarket. My own employer is introducing a SAYE scheme and I shall be signing up to it and urging my colleagues to do so too.

But it is when share options are exercised that SAYE plans go from being risk-free to high-risk. The first rule of investment is do not put all of your eggs in one basket, yet millions of people are doing just that by hanging on to their shares after exercising their share options.

Ifs ProShare, the not-for-profit organisation that promotes employee share schemes says it is typical for a majority of employees to hang on to their shares after maturity. This is not surprising, given the fact that they will only have exercised their option if the shares have gone up in value, creating the expectation that they can carry on going up and up.

The example of Northern Rock shows what can go wrong when investors put their faith in one company.

The Northern Rock share schemes were particularly successful in engaging staff. In 2005, the bank won an award for communication of its employee scheme, promoted with England rugby star Jonny Wilkinson under the strapline, Be a winner. Such was the appetite for shares among staff that 85 per cent of employees signed up.

Some of the 2,000 of the bank's 6,500 staff who are to lose their jobs will also have lost thousands of pounds worth of share scheme savings .

Northern Rock is the extreme but there are plenty of other examples where employees will have lost out by sticking with shares in their employer. Fourteen months ago, 50,000 HBOS staff were celebrating a combined payout of £210m as a tranche of the company's SAYE scheme matured, netting an average £2,440 profit on an investment of £1,830. Anyone holding their shares today will have lost out all the benefit of their SAYE scheme, and more, since the bank's shares have plummeted to less than half their value when the shares matured.

The sound financial advice has to be to stick with share schemes but sell as soon as you can exercise your option. If you want to remain invested in shares, then get diversity by putting your money into some form of equity fund but do not pin all your hopes on a single company.

The dilemma for employers is that they want staff to stay in the schemes. The whole point is to get employees feeling their interests as shareholders are best served by working hard for the firm.

But while companies and corporate intermediaries that help in arranging employee share schemes are happy to promote the many benefits of joining schemes, they should do more to ensure staff fully understand the risks. If they do not, they will end up with unhappy, demotivated staff when things go wrong. In some cases like Northern Rock it will be worse than that. They will have the task of making staff redundant and explaining to them that their savings have gone too.

John Greenwood is the editor of Corporate AdviserMoney Marketing

50 Poland Street, London W1F 7AX

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