An alternative investment option

If the Irish ProShare Association (IPSA) is successful in its lobbying, employees who get stock options as part of their overall remuneration package may be able to use them to fund their pensions.

The association, which was set up to foster corporate ownership by employees, is proposing that staff be allowed to divest earnings from company share schemes into their private pension funds in a tax efficient manner, that is, with income and capital gains tax relief.

Such a move would result in a short-term loss for Revenue but, IPSA argues, would provide greater benefits in the long term as it would help plug the State’s pension-adequacy shortfall and lessen the burden on taxpayers in the future.

For example, if Irish employees could commute €266 million into pension saving from shareholdings, at a future rate of 1.2 per cent, annually compounding from 2018 to 2048, IPSA estimates this would equate to a value of approximately €80,450,000.

The advent of auto enrolment, whereby employees are automatically entered into a pension scheme when they start work, is an opportunity to change the landscape, says IPSA. “Auto enrolment is on the way,” says Gill Brennan, its chief executive. “The Government is moving from a paternalistic to an individualistic approach to pension savings. Whereas in the past, the employer looked after you at work and in retirement, now, you do it yourself. Moreover, we are facing into a time when people will live longer than they worked and the shortfall in social welfare pension figures looks very scary, into the hundreds of billions, in the very close future.”

Defined contribution schemes work whereby the individual puts some money into a pension scheme, the employer does too, and then the individual can add to it from their gross pay via an AVC (additional voluntary contribution), which will be taxed in retirement, at some distant point in the future.

“But people are not saving enough, there is a gap in defined contribution schemes too,” she says. “One of the ways in which we feel this gap can be plugged will be where employees who have a shareholding in a firm can put that shareholding into an AVC, at the market value on that day, and have it taxed in retirement.”

As things stand, when employees get share options at a discounted rate they typically have to hold them for three to five years before they can cash them in, and when they do it triggers a tax. “We are saying they should be able to put it into their pension, or AVC, on the same basis as gross pay, without triggering that tax,” she says.

This has the additional benefit of reducing risk, “instead of holding just one asset, in this case company shares, their money will go into a fund where the risk is spread across a number of asset classes,” says Brennan, pointing out that if bank staff had been able to do this with their stock options, still vastly diminished in value almost a decade after the financial crisis, how much better off they would have been.