offshore bond sales into uk tumble 25 in q1

Sales of regular premium offshore bonds in particular fell off a cliff in the first three months of 2012,  plunging by almost 60% compared with the same three months a year earlier, continuing a sharp decline that was also evident in the fourth quarter of 2011, data compiled by the Association of British Insurers reveals.

Total regular premium sales were £4.4m in the quarter, down from £10.9m in 2011. This followed a 51% fall in total new business sales of UK distributed reg premium offshore bonds in the fourth quarter of 2011, compared with Q4 2010.

Some observers say that in addition to uncertainty on the part of investors over the economy, advisers and their clients may be beginning to consider alternatives to offshore bonds, in response to the removal of commissions and greater transparency being brought in on 1 Jan 2013 by the Financial Services Authority’s Retail Distribution Review.

The winding down by CMI, which closed to new business as of 30 March 2012, is also thought to have had an effect, as has the exodus from the advisory market of some advisers ahead of RDR.

“I think it’s partly the fact that offshore bonds have always had a slightly opaque charging structure, and now, with RDR coming, a lot of advisers are not quite so keen on them,” said Lee Robertson, of UK advisory firm Investment Quorum.

“There may also be some concern among advisers that they could get it wrong, as there still seem to be some gaps about how some of these products are to be treated under RDR, even though we’re a scant few months away from implementation.”

Robertson and others note that the pre-RDR departure from the mainstream advisory market of major UK banks, such as HSBC and Barclays, is likely to have had a significant effect on offshore bond sales, as they are thought to have been big sellers of the bonds.

On 19 June, the Royal Bank of Scotland said it was to reduce the size of its UK financial planning service by around 250 jobs, ahead of a shift to a fee-based remuneration model.

Jeremy Woodley, UK director at the Fry Group, said the company probably sold as many offshore bonds in Q1 as it did in the same period last year, as the products “absolutely” have a role to play in the financial plans of certain high-rate taxpayers, as well as those who live offshore.

“For us, the change [to fewer sales of offshore bonds] came a few years ago, when the tax advantages changed,” Woodley added.

“But for anyone who was selling offshore bonds because it was a simple way of attracting large initial commissions, RDR is likely to have prompted a shift away from them, to other products.”

Confusion, volatile markets

For their part, life company executives agree that confusion and the need to put new systems in place ahead of the implementation of RDR has had an impact on bond sales, on top of the problems of lack of confidence in investment markets generally. But most say they are optimistic that the decline is temporary.

They also note that although the regular-premium business may have suffered badly, it accounts for a relatively small percentage of the total UK offshore bond package.

It is single premium offshore bonds that are the offshore bond industry’s most important product, accounting for £4.7bn last year, and nearly £6bn in 2008. New business sales of these dropped by just under 25% in the first quarter of the year, to £1.2bn – a total that was down from £1.6bn from the same period of 2011, and which came on the heels of a 25.3% drop in the fourth quarter.

While hardly great news, the numbers are actually not quite as dire as those of the UK’s investment fund industry, which, according to Investment Management Association data (see chart, below), saw total first-quarter sales tumble 38% from the same period in 2011. 

 

Quarter ending	Net retail sales, £m (equity, fixed income, money market, mixed assets, property, other)	% change
31/03/2012	3,809	-38%
31/03/2011	6,188

 Source: Investment Management Association

 

AXA Wealth International sales and marketing director Richard Leeson said he is among many in the industry who believe that offshore bond sales have actually held up "remarkably well" in a very difficult investment climate, compared to other collective investment schemes.

"With recent clarification from the Financial Services Authority on the necessity for independent advisers to consider offshore bonds in the post-RDR world, we would expect to see their popularity increase further," he added. 

Dave Fagan, chief executive of Legal & General (International), agrees. "The fundamental strengths of offshore bonds in terms of tax planning remain in place, and will underpin growth once investment market confidence recovers,” he said.

Gerry Brown, technical manager at Prudential, believes that an anticipated boost offshore bonds were expected to enjoy after the UK Government recently capped the permissible amount individuals could contribute tax-free to their pensions at £50,000 per annum has yet to be fully realised – but that it will eventually, most likely boosting new business sales when it does occur.

"One issue is that MIPs [maximum investment plans] have been a better option for many of those affected by the contribution limits," he said. "But in his 2012 Budget, the Chancellor imposed an annual contribution limit of £3,600 on MIPs enjoying qualifying status, [which] tilts the balance in favour of offshore bonds.

"Also, immediately after the introduction of the £50,000 limit, there were, and still are, opportunities to make pension contributions in excess of that limit, centred around the use of ‘carry forward’ provisions [and similiar] tax-planning opportunities, which will reduce as time goes by.

"My hypothesis is that as such options become increasingly limited, the offshore bond route will be left standing as a simple and available option."

Offshore diversification

Faced with what has long been regarded as a mature home market, many UK life companies began reducing their reliance on the UK market years ago by boosting their overseas operations, particularly in Asia. Among the most aggressive has been Friends Life, which in addition to establishing outposts in key cities like Singapore and Dubai, acquired a 30% stake in a Malaysian insurer in 2008, and last year launched a Shariah-compliant business in that market.

Data and anecdotal reports from such regions suggest that this approach could work, providing the companies can manage to break into markets that already have existing players, and, often, involve significant expense in order to become propertly authorised and regulated.

In March, Monetary Authority of Singapore managing director Ravi Menon told a gathering of life insurance industry executives that the average Singaporean was significantly under-insured, and called on the industry to “narrow the shortfall in protection coverage”.

Singapore’s life insurance industry appears to be heeding Menon’s call, as it reported a 12% growth in weighted sales in the first quarter of 2012, supported by a 22% growth in weighted regular premium sales. 

 

 

 

Regular premium	Single premium	Total new premiums, £000
Pensions (indiv & group)		£494
Savings plans		£1,413
Flexible whole of life		£1,443
Other		£1,034
TOTAL		£4,384
	Investment bonds	£57,925
	Personal bonds                    (pooled)	£1,009,683
	Personal bonds           (personalised)	£6,801
	Other single-      premium policies	£94,954
	TOTAL	£1,169,363