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Anthony Hilton: Labour’s share plans may not be quite such a danger

Share plan: Shadow chancellor John McDonnell
Share plan: Shadow chancellor John McDonnell / Getty Images
24 September 2019

Labour government would channel 10% of shares to employees over 10 years in any company with more than 250 staff.

The law firm Clifford Chance says this would hit the pension funds, which have about £310 billion of UK London-listed equities. The Financial Times splashed this on Page 1 on Saturday saying the “Equity-to-workers scheme would cost £31 billion.”

The estimable Neil Collins, in the FT of the same day, but on page 22 just before the prices pages, talks about Help to Buy — “the crack cocaine of the housing market”.

He remarks that the House of Commons public accounts committee recently said this policy had cost the taxpayer £32 billion, with no boost to affordable housing.

The committee’s conclusions echo those of the National Audit Office earlier this summer, so they are probably right. Yet the Conservative Government says Help to Buy will continue.

The scheme applies only to a small proportion of the housing market and even fewer taxpayers, yet it apparently costs more money than Labour’s much bigger scheme. The average tax take is about £800 billion a year so perhaps £32 billion of tax loss counts as small beer. The market capitalisation of the listings on the London Stock Exchange as of April last year was $4.59 trillion according to Wikipedia — getting on for £4 trillion at today’s exchange rate.

On this basis, a hit of £31 billion is less than 1%. Over 10 years it would be less than 0.1% per annum — or £3 billion, even smaller beer.

Another way of looking at this is to note the considerable market volatility since April 2018, both up and down. In the down phase, markets were off more than 10% in a few weeks. The pension funds did not squeal then. The exchange rate too, perhaps because of Brexit, has fallen by much more than 10% since the referendum. The pension funds did not squeal then either, but just got on with it.

Nor do they moan about changes to corporation tax, though this too affects distributable profits. In fact shares rising and falling by 10% is par for the course for long-term investors. The FT’s figures need to be treated with caution anyway, in taking 10% of the £310 billion to arrive at the £31 billion figure.

Several things don’t compute. First a large number of middle and smaller companies have fewer that 250 employees so not all of the listed companies would be eligible.

The policy also applies to private companies and those which are subsidiaries of foreign firms, which account for more than half by value of manufacturing industry. They will figure but they are not in the listed companies mix.

I do not have a value for pension fund investments in this space but owning alternative assets and private equity as many do, means some of these will be eligible. So the £31 billion calculation may be more or it may be less. It is unlikely, however, to be accurate.

Then there is another problem. The CBI business lobby has held that the policy will cause “a major hit to investors, many of whom are pension funds”. Putting aside the fact that pension funds have shed most of their equities in the last 15 years, institutional investors, who account for most of the remaining pension fund equity investment in the UK, are mostly short-term.

They turn over their investments at least once, and usually twice, a year. The 10 years of the Labour programme

is hardly going to affect them in practice — even it they make a lot of fuss

about it.

And they have never worried particularly about executive incentive schemes and bonuses. Assorted academic research has said that companies are no more profitable, resilient or secure today than they were 30 years ago when no one was paid incentives. The policy appears to be a fraud but that does not seem to bother most institutions.

In addition the assorted buybacks by companies which stop the shares from being diluted when the executive gets his largesse are usually greeted with glee by institutions — though goodness knows why.

In the United States buybacks are much bigger than dividends, so the amount for executives is quite considerable. Yet it is the workers who are the backbone of a company. Executives come and go. So why not give the workers a stake?

Finally the uncertainty about Brexit is thought to have done more long-term damage to the stock market than any putative Labour policy. But that is a Conservative idea.

Enough said.