Pension funds face £31bn cost under Labour’s bid to give staff 10% of shares

A plan by the Labour Party to introduce inclusive ownership funds (IOF), giving 10 per cent of shares in large UK companies to employees, will cost pension funds £31bn, according to Clifford Chance.

The law firm has undertaken analysis that reveals the £31bn cost will be split between different types of pension funds. Defined benefit schemes will face £9bn of costs, whilst local government pension funds and defined contribution schemes will have £8bn of costs, and self-invested personal pensions (sipps) £6bn of costs.

Clifford Chance said the cost will be shared between pensioners, businesses and local authorities.

This differs from figures published by the Labour Party, which found the impact on pension schemes would be limited, as only 3 per cent of quoted UK equities is held by pension funds, based on information from the Office for National Statistics (ONS). This is equates to £78bn.

However, Clifford Chance has warned that the 3 per cent only shows direct equity holdings, and in practice only the largest pension schemes hold equities directly. Most pension schemes instead hold equities through collective investment vehicles such as unit trusts, investment trusts and ETFs, which are not included in the ONS figures.

Furthermore, the ONS report excludes unquoted equities and doesn’t cover sipps. Therefore, Clifford Chance argued that Labour’s figure undercounts UK pension funds’ exposure to UK equities.

The proposal by Labour would require 10 per cent of the shares in all UK companies with more than 250 employees to be owned by inclusive ownership funds. The dividends on those shares would then be shared between employees (but capped at £500 per employee), and the balance paid to the government.

Clifford Chance’s analysis shows a total cost to investors of around £340bn, but a benefit to employees of around £1bn a year, with the government receiving 90 per cent of the benefit.

Commenting, Clifford Chance partner, Dan Neidle, stated: "The aim of this policy – giving employees an ownership stake in their companies – is laudable. However, the method is entirely misconceived. The cost to investors will be over £300bn, including a £31bn cost to pension funds. However employees will receive only around £1bn per year.

“This is an astonishing mismatch between the cost and the benefit. There are many better ways to achieve Labour's aim, such as broadening existing employee share scheme rules and creating better incentives for businesses to adopt them."

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