Fall in equities takes the gloss off the SSIAs

It seemed too good to be true but we were all ready to believe it anyway. The Government would not only give us €1 for every €4 we saved, but it would also let us invest the sum in the stock market so that we could watch our savings grow even further.

Effortless wealth was ours for the taking, as long as we could keep up our equity-based SSIA payments for five years.

A few months into this five-year game, things are looking a little less bright however, with SSIA subscribers who opted for equity-linked products presumably feeling a touch nervous.

Since April, the markets have been plumbing ever lower depths, with the continuous slide showing no sign of abating. Take this day last week. Last Friday, the Dow reached a low not seen since October, 1998, and the Standard & Poor's 500 index of leading shares plunged to close 40 per cent down on its 2000 high. Closer to home, €500 million was wiped off the value of Irish shares. All of this in just one day and the incident is by no means isolated; each new week seems to bring yet another spate of bad news.

Amid the chaos, the unfortunate thing to remember about equity-based SSIAs is that, by their very nature, they do not offer guarantees. These are unitised schemes, where the savings are invested in a unit fund or unit trust exposed to the equity markets. As any investor worth his salt will be aware, equity markets are rarely predictable, even for the experts.

Figures from MoneyMate show that the average general Irish equity fund shed almost 7 per cent of its value in April this year, 3.5 per cent in May and more than 10 per cent in June. This means that a €100 sum invested in one such fund in March, just about the peak of SSIA euphoria, is now worth about €80, a performance which, if imported into the SSIA hypothesis, just about wipes out any Government contribution.

The organised people who got in at the start - May 2001 - are even worse off, since they have had more time to build up their funds and thus have more to lose.

Take an individual who committed to putting away the maximum contribution of €254 per month in an equity-based SSIA with AIB, for example. The most popular option here was a managed fund, with the majority of AIB's 55,000 equity-based investors choosing this vehicle. As of last Friday, that investor had squirreled away €3,810 into their fund over 15 subscriptions. When the Government contribution is thrown on top, the value of the nest egg rises to €4,762.50. But not for long - when the harsh effects of the bear market are considered, the amount is reduced by 13 per cent to €4,133.21.

Mr Brian Woods, finance director of Ark Life, AIB's life assurance wing, said "the number of phone calls increased" recently when Ark Life customers were officially updated on the performance of their equity-based SSIA. No surprise there perhaps, but it is also worth noting that few have requested that their funds be transferred into a guaranteed deposit product, also available with AIB.

Mr Woods said AIB marketed the equity products not as five-year investments but as commitments for a seven to 10-year term. He said the fact that most of AIB's equity investors opted to put away the maximum permitted amount every month was an indication of market sophistication and affluence - qualities that tend to come with an understanding of how equity markets can move in both directions.

In February an analysis of the various SSIA offerings was conducted by Becketts Employee Benefit Consultants. At that time, Becketts weighed up the options and worked out that continuous monthly subscriptions over five years could be likened, in capital terms, to investing a lump sum over two-and-a-half years. On the basis that unit-linked savings plans have traditionally carried a recommended hold term of 10 years, the consultants questioned the premise of the equity-based SSIA.

"It is debatable whether a five-year savings term is suitably long enough for a regular saver to benefit from the various swings and roundabouts of equity-based investment unless the fund carries some guaranteed return," according to the analysis.

A quick calculation revealed that a unit-linked plan carrying a 5 per cent bid/offer spread would require an annual return of about 10 per cent over five years in order to beat a deposit account.

Last week Mr John McGovern of Becketts was still doubtful about the merits of an equity-based SSIA but said the best option for those who had succumbed to their allure at this stage was to stick with their choice. "The wrong thing to do would be to switch out. The damage is done at this point," he said, suggesting that sticking around for a market upturn was probably the best policy. "If you really need the money on anniversary, you should switch a quarter of the fund into cash, but I don't know whether it would be of benefit."

Mr Dermot O'Brien, head of retail investments at Irish Life, said that most of the 56,000 SSIA investors who put their money there have "lost pretty much the Government contribution or slightly more", but again reports no evidence of investors rushing to the door.

Mr O'Brien said the current downturn may, in the end, turn out to be a positive for equity-based SSIAs, particularly for investors who got in late.

"In a way, if there's going to be a fall in the markets, you want it at the beginning," he said, adding that equity-based SSIAs were now well-placed to take advantage of good value in the markets.

"The funds are getting stocks cheap," he said.

His optimism is shared by his opposite number in Hibernian Life & Pensions, where about 20,000 investors chose the equity route.

"It could be that in four years' time, people will almost have forgotten what has happened in 2000 and 2001," said Mr Dara Fitzgerald. "The expectation is that market conditions will improve."