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Labour’s inclusive ownership fund – what does it mean for investors?

We take a look at one of Labour’s flagship, but most controversial policies.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Labour’s plans to require thousands of UK businesses to create Inclusive Ownership Funds (IOFs) is one of the more radical and potentially transformative policies announced in the run up to this general election.

UK businesses with 250 or more employees will have to set up an IOF, into which they will then progressively transfer 10% of share capital, at a proposed rate of 1% a year for 10 years.

The funds will be owned collectively by employees, with dividends paid on the shares being distributed to the employees but capped at £500 a year per employee, with the balance being paid to the Treasury.

Labour says this payment to the government would be used to support their Climate Apprenticeship Fund.

Why employee ownership?

Aside from the ideological appeal (at least in the eyes of the Labour leadership) of transferring ownership of the means of production to workers, there’s a widely supported view that companies in which the workforce has a stake in the business tend to perform better.

This is a philosophy which transcends party allegiances. The Conservatives have long-encouraged employee share ownership schemes and the Liberal Democrats in their election manifesto propose employees should have a right to request shares in their employer’s company.

The key difference is how the different parties aim to deliver on this commonly held ambition.

There is a strong ethos of collectivism about the IOF policy, with shares distributed equally across all workers, as opposed to many existing share schemes which tend to favour higher-paid employees. It’s also expected that the votes held by IOF shares would be cast in a block, rather than by individual employees. This would create a significant new stakeholder voice at the boardroom table.

How would it work in practice?

The headline proposal of the transfer of shares to employees would entail the forfeit of around £300 billion of share capital (according to the Financial Times). This would have a direct impact on the savings of millions of investors, whether direct investments or through their pension funds.

The expected value of the dividend distributions to the IOFs would range between £5.8 billion and £10.7 billion a year, depending on whether or not they are restricted to the distribution of UK-based earnings.

Either way it would be naïve not to expect the scheme to hit some obstacles. Potential issues include:

  • The prospect of a legal challenge, given it involves the transfer of ownership and value from existing shareholders to the IOF scheme members.
  • Firms choosing to restructure or transfer activities or ownership abroad to minimise the scheme’s impact.
  • Firms could cut dividends and instead return surplus cash to shareholders in the form of share buy-backs.

There are also some questions which remain unanswered. It isn’t clear how employees would be treated on leaving employment and what residual rights they might have, if any. Nor is it detailed how the governance of the IOFs would work and how they would exercise voting rights.

There will be anomalies, too. Some firms with big stock market values could avoid the scheme because of their low employee numbers – Fevertree for example only employed 135 people at the end of last year but has a market capitalisation of £2.5bn.

Meanwhile there will be firms of much lower value, and with low profits, which employ more than 250 people and would be caught by the scheme.

The threshold of 250 employees could also provoke unintended consequences, given the very significant impact this threshold would have on firms’ recruitment activities. We think it’s likely over time Labour would look to bring the 250 employee threshold lower.

How quickly could the policy be implemented?

If Labour forms the next government, we think they’d look to implement this policy quickly.

It seems unlikely they could do so without consultation though, so investors could reasonably expect some notice of its implementation. We could see companies bringing forward dividend distributions to existing shareholders to pre-empt the introduction of the scheme. As ever, no-one can predict exactly how or when share prices might react.

Whether or not you agree with Labour’s policies, there is a general theme of favouring the workers against those who have already accumulated capital. If you are in the latter category (or both), there’s a limit to what you can do to protect your wealth. Use the allowances you can, such as pensions and ISAs, for you and your family. If you’re not sure, our financial advisers can help you with your long-term financial plan.

Read more of our general election coverage

All our latest expert comment in one place.

General election 2019

HL is not expressing a view on the merits or otherwise of any of the policies or any of the political parties, and nothing in this note should be taken to be an endorsement or recommendation of any particular party, candidate or policy.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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