The UK Treasury has announced changes both to the bonus rates which apply to the popular Save-As-You-Earn (SAYE) share option plan and to the way in which the rates will be set in the future. The changes take effect from 1 October 2001. For three-year contracts, the effective annual interest rate is to be reduced by more than one per cent. The bonus rates have not been changed since October 1998. In future, they will be adjusted automatically every 1 September in line with three-, five- and seven-year market swap rates and, at other times, in the event of dramatic changes in these rates.
Employers planning to operate their SAYE plans after October should consider bringing the grant date forward, subject to any applicable regulatory restrictions, to allow participants to benefit from the existing bonus rates. Applications for contracts using the old rates must be received by the plan administrator on or before 30 September 2001.
The UK approved SAYE is an option plan linked to a statutory savings contract administered by authorised institutions such as banks and building societies. Options are granted at the outset with an exercise price discounted to market value by up to 20 per cent.
Participants save by a monthly deduction from their salary, within prescribed limits, for a three-, five- or seven-year period. On maturity of the contract, they are entitled to the amount of their savings plus a tax-free bonus and can, if they wish, use this money to exercise their option. No income tax or national insurance contributions (UK social security) are payable at any time, with certain limited exceptions.
The plan is extremely popular amongst employees and achieves high take-up rates. About 1,750,000 employees of 1,200 companies participate in SAYE. However, its future is in some doubt, due to the recent introduction of the new All Employee Share Ownership Plan (AESOP). Employees tend to view SAYE more favourably than the AESOP because it is seen as risk-free. SAYE participants have a choice at maturity whether or not to buy the shares for which they have saved.
Under AESOP, shares are purchased with employee contributions from the start and employees are therefore staking their own money on their employer's equity performance. The government has put its weight fully behind the AESOP and, if employers adopt the new plan in insufficient numbers, it is expected to withdraw SAYE or at least make it less attractive.
The bonus rates (and effective annual interest rates) before and after the changes are as follows:
|Contract Type||Old Bonus Rate||Interest||New Bonus Rate||Interest|
|3 year||2.75 monthly payments||4.83%||2 monthly payments||3.67%|
|5 year||7.5 monthly payments||4.65%||6.2 monthly payments||3.99%|
|7 year||13.5 monthly payments||4.52%||11.9 monthly payments||4.07%|
The new rates apply to contracts in force at the time of joining an SAYE plan. The old rates continue to apply to employees who have already joined SAYE or do so before 1 October 2001. The early leaver rate applies to people who leave a plan after a year but before maturity of their savings contracts.
Employers should contact their McDermott, Will & Emery lawyer who can assist with the design, implementation and operation of SAYE plans and provide companies that already have SAYE plans with employee communications explaining the changes.