Debi O’Donovan, editor of Employee Benefits: Is it a bad idea to let staff invest to much of their money in their own employer?

A few weeks ago a press release crossed my desk that made me splutter into my morning coffee. It was from the not-for-profit body ifs ProShare that promotes employee share schemes, and it was calling for an increase to the current limit of £250 a month that employees are allowed to save into these schemes.

To be fair, it was promoting savings into sharesave (aka save as you earn – SAYE – schemes), which are a risk-free share savings scheme, so no one is likely to lose out should share prices fall.

What touched a nerve for me is that the release particularly pushed this level of savings to those earning up to £21,000 a year – a group it termed the ‘lower paid’. To me the idea of getting this group to put a substantial portion of their net pay towards a shares in a single company, that may result (if they opt to buy the shares at the end of the contract) as being extremely bad.

Of course, best practice dictates that on maturation of the scheme, if employees opt to buy the shares – as opposed to simply cash in the savings – they should sell their shares and spread their risk across several investments.
The majority will no doubt immediately sell their shares and spend the money, but some will hold on them – with no counter advise from employer or advisers. We saw the impact of this when thousands of staff at Railtrack, Northern Rock and Enron were left holding thousands of worthless shares.

This dreadful scenario of staff may be being exacerbated by current moves by the financial advice market. It appears that every IFA and consultant is promoting the concept of self-invested personal pensions (Sipps) linked to share incentive plans (Sips) as a way to maximise tax breaks.

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In itself, this is a good idea. But if you extrapolate this to its logical conclusion you will easily have many employees largely reliant on a single company for their income and investments. Their employer pays their salary, their pension contributions and now they may hold a substantial of share capital in that same company, as well as have a disproportionate amount of their pensions investment in the self-same company. In the current recession this is extremely dangerous.

I fully support high levels of employee share investment for top-level executives, but not as a good idea for the average or lower paid employee.