Ten Green Bottles: are more SAYE providers about to fall?

This article was contributed by our sponsors, Computershare

Iain Wilson, Client Relationship Director of Computershare Plan Managers, considers how healthy Save As You Earn (SAYE) employee share plans currently are.

Walking to the train station on a cold and windy morning in February, I was snapped fully awake by a caller asking: ‘Is it true that Computershare is pulling out of the SAYE market?’

Once I’d finished laughing, I stopped to think about where this rumour may have come from.

Yes, this is a time when providers are questioning their commitment to the market, and in several cases, considering withdrawal, but this needs interpretation – it’s certain types of provider who are thinking of withdrawing.

By SAYE, I mean an options plan linked to a separate banking product, enabling a participant to save enough money to exercise the option when it matures. Historically, SAYE has been provided by two types of company – Building Societies and Banks, who had the savings mechanisms to deliver the service and added on the administration capabilities; and value-add administrators like Computershare, who also offer banking.

Building Societies and Banks were attracted to SAYE because it offered them a ‘captive’ base of regular savers and the resulting savings book offered very handsome margins. This enabled them to offer free administration and communications.

Recently though, this has proved to be a totally unsustainable model, for three main reasons. Firstly, lower interest rates have meant lower margins. Secondly, falls in interest rates expose SAYE providers to huge losses because each participant locks in at a guaranteed bonus rate at the start of the contract. Thirdly, SAYE enables employees to cash in their old plan in favour of a new offer, to take advantage of lower option prices. This is a triple whammy for SAYE providers who bear the cost of closing accounts, refunding money, and receiving and processing a new application, while losing the funds on the deposit from which it derives its revenues.

The impact of these issues is evidenced by the decisions of institutions such as Nationwide and Abbey to pull out of offering SAYE services. The market has also seen the introduction of administration fees for smaller clients, because the employees of these companies don’t generate sufficient interest for the banks to provide services at zero cost. To remedy this, banks have lobbied for higher savings limits for participants (£400 per month instead of £250). This would be in the interests of the employees contributing the maximum allowable per month, and would result in higher balances and returns, and an opportunity for banks to retain their existing SAYE model.

Conversely, administrators like Computershare have never been able to derive the same kind of value from SAYE savings as the Building Societies and Banks. We’ve always focused on being competitive by enhancing services and stripping out cost and risk through automation of processes. The administrators have been at the forefront of introducing new technology to the execution of SAYE plans, including the removal of email data transfers by using encrypted file share applications. Innovations for the participant have included web and telephone enrolment, online savings account closure, and real-time maturity web services allowing participants to exercise, sell or transfer shares to complementary products.

This efficient, customer service focused model of SAYE provision has created a sustainable business model for discerning clients, but hasn’t catered for companies unwilling to pay. Free services are disappearing for all but the biggest companies. Where they’re still being offered to smaller clients, they’re effectively being subsidised by the interest margins gained from the savings of employees in large companies. Issuers are now considering the diversity and quality of products on offer instead of price, and are taking advantage of the wealth of services developed by the administrators. The competitive edge and value-add products we developed now set us apart in a market increasingly accepting of paying fees.

So – the reason I laughed as a result of the call, was that whoever started the rumour simply hadn’t thought it through. Well-established, efficient, customer focused services mean that the administrators will continue to deliver SAYE, regardless of interest rates and as we’re launching services to over 250,000 participants in 2009, that’s probably just as well.

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