NEW RESEARCH published by the Trades Union Congress (TUC), Common Wealth, and the High Pay Centre shows that UK workers get comparatively little benefit from share dividends – despite common claims that they do. 

The report, Do dividends pay our pensions? finds that the proportion of UK shares directly held by UK pension funds fell from almost one in three in 1990 to less than one in 25 by 2018 – a decline of over 90 per cent.

Over this period, ownership of UK public companies shifted from UK pension funds to foreign owners and investors whose identities are often obscured by lax reporting rules.

The authors say that workers in UK listed firms deserve a clearer understanding of who now benefits from their labour, and how much is captured by a wealthy minority.

Pension funds and share ownership 

For nearly 20 years, from 1981 to 1998, UK pension funds accounted for over a quarter of the total market value of UK listed shares. However, this steadily declined to just under 13 per cent before the financial crisis in 2008. It then fell sharply and now stands at around 2.4 per cent for direct ownership, and six per cent with indirect ownership included.

The remaining shareholder returns to pension funds disproportionately benefit a wealthy minority. The richest 20 per cent of UK households by income own 49 per cent of pension wealth in the UK. Individual private investors have declined from over 50 per cent of UK share value in the mid-1960s to less than 14 per cent today.

Within individual share ownership, there is significant inequality. For UK households, the richest one per cent own 39 per cent of total share-based wealth, more than the poorest 90 per cent combined.

Most UK listed shares are now accounted for by foreign investors – a tenfold increase from 5.6 per cent of share ownership in the mid-1970s to 55 per cent today.

The change in ownership not only affects who benefits from company profits, it also has implications for the stewardship of boardrooms by shareowners and prioritisation in decision-making.

Short-term profit culture 

As pension funds divested, and other types of shareowners came to dominate, the balance of boardroom decision making has also tilted away from reinvestment and toward value extraction.

This is reflected in boardroom remuneration policy. High Pay Centre research found that 82 per cent of FTSE100 CEOs performance-related pay is linked to profitability, dividend payments, buybacks and share price gains.

Between 2014 and 2018, FTSE100 companies paid out £442 billion in dividends and share buybacks. Today’s workers and pensioners get little benefit from these dividends. And the extraction of this much value reduces funds for pay improvements, pension contributions or re-investment to secure the long-term success of the firm.

There is public support for reform to make firms balance the interests of shareowners with those of staff. Polling by BritainThinks for the TUC found that 76 per cent of workers back a legal obligation for firms to give as much weight to the interests of their staff and other stakeholders (e.g. local communities) as to their owners or shareholders.

Recommendations for reform 

The report authors say that the balance between the interests of a firm’s workforce and its shareholders has tilted too far towards shareowners and away from the working people who create the wealth. And they call on the UK government to step in with reforms to restore fairness to UK workers.

  1. Directors’ duties should be rewritten to remove the current requirement to prioritise the interests of shareholders over those of other stakeholders. When making decisions, boardrooms should promote the long-term success of the company as their primary aim and be legally obliged to give as much weight to the interests of their staff and other stakeholders as they do to shareowners.
  1. Boardrooms should include seats for workers, directly elected form the firm’s workforce. This is a tried, tested, and successful approach that is already mainstream practice across Europe. It not only helps with the fairness of decision-making for the workforce, it also improves the quality of decision-making by diversifying boardroom skills, avoiding groupthink, and bringing shopfloor insights.
  1. Reporting requirements must be stronger for public companies and the investment industry. It is currently too hard to obtain clear information on who provides the capital that asset manages invest in shares. And stakeholders need clearer reporting from companies to show how they are distributing revenues and profits among stakeholders and as reinvestment in areas like R&D and training.
  1. Workers need stronger collective bargaining rights. Research shows that workplaces with collective bargaining not only pay staff better. They also have more training days, more equal opportunities practices, better holiday and sick pay provision, more family-friendly measures, and better health and safety.

The TUC General Secretary, Frances O’Grady, said: “Working people deserve a fair share of the wealth they create. This should come through wages, pensions, and reinvesting profits to safeguard the future of the firm and its workforce. But in the last two decades, wages have stagnated. Pension schemes have been curtailed with the loss of defined benefits. And the connection between UK pensions and UK shares and dividends has been severed.

“This isn’t how it should work. But we can restore fairness by reforming company law so that directors have duties beyond short-term profits for shareholders. And we can restore the power that workers need to gain their fair share with stronger bargaining rights.”

Mat Lawrence, Director of Common Wealth, said: “The economic story of the decade is clear: workers have suffered while asset-owners have surged. Ensuring working people share in the wealth they create is fundamental to turning ‘levelling up’ from rhetoric to reality. But critically, if companies reduce dividends and increase wages and investment, this mustn’t come at the expense of ordinary pensioners.

“With pension wealth inequality so high, the stock market is starkly disconnected from ordinary savers. The solution is a fair settlement at work and social security system that provides security and dignity in retirement”.

Luke Hildyard, Director of the High Pay Centre said: “The link between the fortunes of the UK’s biggest businesses and the prosperity of the country as a whole is getting weaker and weaker.

“Our research shows that a tiny and shrinking proportion of corporate Britain’s vast pay-outs to shareholders reaches ordinary savers, while workers are denied a voice in the running of the companies they help to succeed.

“We need economic reforms to make big business work for the benefit of everybody, not just a small number of wealthy executives and investors.”

* Read Do dividends pay our pensions? here.

* Source: Trades Union Congress