Some harsh lessons for investors in equity SSIAs

The SSIA scheme fostered a culture of saving at a time of plenty, but not all SSIA accounts were created equal, writes CAROLINE MADDEN

MOST PEOPLE would agree that the Government’s Special Savings Incentive Account (SSIA) initiative was a success – it fostered a culture of saving at a time of plenty, and left many people with a five-figure financial safety net that they are now extremely grateful to have (assuming they didn’t blow it all on new cars, redesigned gardens or kitchens).

But of course not all SSIAs were created equal. The size of the nest egg at the end of the five-year savings period very much depended on the type of account that the saver chose, and indeed, the point in time at which they signed up.

And although those who took a risk on equity-based accounts generally fared considerably better than those in safe-but-dull deposit products, if they allowed those accounts to roll over after the maturity date, there’s a good chance their SSIA “feel good” factor has been obliterated by the ravages of the stock market in the interim.

A total of 1.17 million SSIA accounts were opened between May 1st, 2001 and April 30th, 2002.

The bulk of savers signed up at the last minute – roughly 60 per cent of accounts matured between March and April 2007. Approximately 80 per cent of accounts opened were deposit-type products.

“This reflected the investor’s reluctance to invest in unitised funds due to the prevailing market volatility at that time,” says Becketts, the personal financial planning division of Hewitt Associates, referring to the turbulence that followed the bursting of the dotcom bubble.

“However, those investors who applied their monthly contributions to the unitised option fared better, on average, than the deposit investors.”

Becketts carried out a series of surveys to determine the best and worst-performing SSIA products, concentrating on savers who contributed the maximum amount of €254 per month for the full 60 months without any investment switches – a total of €15,240, attracting a Government top-up of €3,810 for a total investment of €19,050.

The survey results found that the maturity value of equity-based SSIAs tended to be closely linked to the state of health of the Irish stock exchange at the end of the five-year savings period, as financial institutions were generally weighted in favour of the domestic stock market.

Therefore, the first tranche of equity SSIAs which began maturing in May 2006 were affected by the fact that the Iseq was undergoing a correction at the time.

Becketts found that the highest gross maturity value produced in the first four-month tranche was €29,535.

It was a sign of the times that this was from a unitised plan invested in an Irish property fund. The lowest maturity value was delivered by a technology fund which paid out €17,727.

However, the Iseq soon returned to form – in fact soaring to new heights and breaking through the 9,000 level for the first time by the end of the year.

And as the Iseq marched steadily upwards each month, so too did the value of maturing equity SSIAs.

By November, several equity funds broke the €30,000 mark, and by December, some savers in Quinn Life’s Celtic Freeway unitised fund found themselves with a windfall of €33,372.

During the final four months of maturities, January to April 2007, payouts from equity-based products remained high, but slipped back marginally. This reflected the movement of the Iseq index, which peaked and then began falling back in line with declines in worldwide equity markets.

The highest maturity value in this tranche of payouts was €32,297 in February, delivered once again by the Quinn Life’s Celtic Freeway fund. Among the lowest payouts was €18,922 delivered by a variable deposit investment in November 2006. “The highest and lowest payouts were achieved in general by a very small number of SSIA account holders,” Becketts said.

“Most would have achieved returns in between these extremes, typically in the region of €20,000.”

However, although those with equity-based SSIAs generally fared better, many of these savers have seen a huge chunk of their nest egg wiped out by the carnage in stock markets since the credit crunch struck in 2007.

At the time when equity-based SSIAs were being marketed, most financial institutions sold them as “open-ended” products and emphasised that they should be viewed as a seven to 10-year investment horizon (at least), even though the SSIA scheme – and the Government bonus payments of 25 per cent – only lasted for a five-year period.

Although equity savers would have received some communications from their financial institution in the lead-up to the maturity of their fund, any decision to halt contributions, cash in the fund, or move it to another fund was down to the individual investor.

Unless they instructed otherwise, their monthly contributions would continue – either into the fund in which they had held the SSIA or another default fund nominated by the provider.

Many equity customers simply let their accounts roll over, either by default, because they simply didn’t get round to deciding on an alternative, or because they believed that stock markets would continue their stellar performance.

Unfortunately, the opposite happened. Stock markets crashed. Major share indices fell by between 40 and 50 per cent in 2008. And Irish pension managed funds fell by more than a third last year.

A fall of this magnitude would have more than wiped out the Government “top-up” that had made SSIAs so appealing.

“It’s quite an issue actually,” says David McCarthy, managing director of McCarthy Associates Financial Consultants. The SSIA plan was supposed to be a five-year investment horizon, he points out.

“The problem here is that there was quite a serious intent on the part of the institutions that had these to obviously get business beyond the five-year term . . . They knew that at the outset when they encouraged people to take them out,” he continues.

“And I believe that they looked upon the SSIA as somewhat of a loss leader in terms of the first five years. The big thing was to keep [people] saving.”

A lot of people didn’t bother reviewing their equity SSIA, he says, and just allowed it to drift on in the fund which they were sold originally – or whatever default fund their provider moved it to upon SSIA maturity – without standing back and making a judgment call.

“Now they’ve seen the value of the fund . . . decimated, and they’re seeing the value of the [subsequent] contributions that they’re putting into it have been decimated as well.”

He estimates that thousands of people around the State have been caught out by this. Most continued making the maximum contribution of €254 a month, effectively throwing good money after bad and compounding the damage.

Although the losses incurred depend very much on the individual fund in which they were invested, “they’re all down substantially”, he says.

So what action, if any, should savers who now find themselves in this situation take? “I wouldn’t encourage anyone to cash it in unless they’re in difficulty financially and they need cash,” McCarthy says.

Instead, they should stop making contributions into the fund, and hope for a recovery in the value of their investment, he recommends.

Mark O’Sullivan of Becketts has also encountered many savers who decided to let their SSIA “ride” in the equity product they were sold, “but then they forgot about it”.

However, although they have sustained a serious hit, O’Sullivan notes that many of these individuals are taking a philosophical view of their situation, recognising that whatever money is now left in their SSIA kitty would not have been saved at all if it had not been for the great Government giveaway.