Alan Healy: Will our conservative savers invest their deposits

Tánaiste and Minister for Finance Simon Harris with the Governor of the Central Bank of Ireland Gabriel Makhlouf at the first Annual Savings and Investment Forum at the Central Bank. Picture: Leah Farrell

The Department of Finance and the European Commission are embarking on a challenging mission: encouraging a fiscally conservative Irish population to put their money in riskier investments.

It's a tall order when you consider the State's relatively short history and its people's even shorter experience with significant levels of personal wealth.

Ireland has now enjoyed three decades of low unemployment and increasing household wealth built on its economic model of open trade, a multinational investment.

The result means households have built up a €1.3 trillion nest egg, two-thirds of which is housing, but almost €170bn is held on deposit in Irish bank accounts. Irish households hold just 2.3% of their financial assets in direct investments such as stocks and debt securities. This compares to an EU average of 7.5%

The EU and the Irish state are hoping for more of these deposits to be made active and link them to companies across Europe, helping them access capital for growth. The aim is to remedy the very real funding gap for growing Irish and European companies.

Nearly half of Irish SMEs report that it is still difficult to access funding, and 51% believe lenders are less willing to finance small businesses than they were six months ago, even as demand for external finance continues to grow.

The €1m to €3m range is seen as the critical gap; below this, company founders can rely on family and friends. Above €3m, and private equity becomes an option. A middle group where companies are trying to make the leap from small business to a scalable enterprise is underserved.

The State set out its stall this week on how it hopes to achieve this. Financial literacy is one strand. The right vehicle to unlock savings is another. 

There is precedent. Two decades ago, the government’s SSIA scheme encouraged households to put excess savings into a Government-backed scheme. The response from a fiscally conservative population like Ireland was remarkable.

Almost 1.2m SSIA accounts were set up, with 40% saving the maximum of €254 per month. Thousands more rued the fact that they missed out. The scheme also attracted savers from a broad spectrum. Almost half were savers on low incomes, highlighting an appetite from all income groups for interest potential when the right incentives are put in place.

However, there were clear differences. The SSIA scheme on 2022 is unlikely to be repeated, offering €1 for every €4 put in by households. Despite the exit tax on interest earned, it was still a very attractive scheme. Savers invested almost €8bn over the five-year period. When it matured over 2006 and 2007 between €14bn and €16bn went back out into the economy.

Charlie McCreevy's SSIA Scheme ultimately became a hallmark of the Celtic Tiger era. One of the reasons it was put in place was to take cash out of the economy and help curb inflation running at 7%. The result was mixed. Almost a third of SSIA savings went on consumer spending upon maturity. An estimated €1bn went on foreign holidays and €2.3bn on home improvements. 

However, almost half was rolled into new savings accounts or other investment products, highlighting the potential amongst households to consider State-backed schemes for investment.

Ireland is not working alone on this proposal. The EU launched its Savings and Investment Union a year ago, explicitly linking excess household savings to investments in European companies. 

Why Irish savers are so risk-averse is a question rooted in our history. The Central Bank Governor, Gabriel Makhlouf, made the most recent attempt at an understanding.

"This low level of direct retail participation reflects a complex interplay of historical, cultural, and structural factors that have shaped how we think about savings and investment," he said. 

"Significant barriers persist. Psychological and emotional barriers are deeply rooted, perhaps in Ireland's economic history and the financial crises we have experienced."

Whether these barriers can be overcome remains to be seen.

Minister for Finance Simon Harris is confident the right investment vehicle will attract interest. "Too much of people’s hard-earned savings remains in low-yield deposits, where inflation can erode value over time.

"Investment in capital markets can offer households another path to long-term financial wellbeing, while also supporting growth and competitiveness in the wider economy."

Europe and Ireland do not lack savings or capital; they lack the ability to deploy them. Efforts over the coming months and years will bear that out.