The outlook for 2012, they add, is difficult to call, particularly ahead of the Budget, which will be unveiled on 21 March, and which could contain changes to the 50% tax rate – introduced in April 2010 – that many believe has encouraged greater take-up of offshore bonds.
In total, some £5.96bn worth of offshore bonds were sold into the UK market in 2011, compared with £6.44bn worth in 2010, according to data just released by the Association of British Insurers (ABI), which obtains it from the eleven major insurance companies active in the market.
Sales of regular premium offshore bonds in particular lost their way in the fourth quarter, plunging 51% with the same three-month period in 2010, although single-premium offshore bonds fell by more than 25% in the quarter (see chart, below).
The 2011 total looks respectable next to the 2009 result, however, which was barely above £4.6bn.
Offshore bonds industry experts cite various possible reasons for the decline in offshore bond sales from 2010 levels, including a decline in consumer confidence and uncertainty about the future direction of global financial markets.
Few were able to offer an explanation for the dramatic decline in the fourth quarter, particularly in regular-premium product sales, although it was noted that this was a time of heavy and constant media coverage of the European single currency’s problems, and the related sovereign debt crisis in Greece.
Some of the reduction in regular premium business could, a Legal & General spokesman said, be the result of some individuals shifting “towards recurring single premiums, whereby clients make regular top up payments – say, monthly – to their single premium product", a phenomenon he said L&G has observed taking place recently.
Such regular top-ups, he noted, typically work out to be "more flexible and cost effective than paying into a regular premium product", and might therefore have caught the eye of some savvy advisers and their clients.
That the release of the ABI data came on the heels of last month’s announcement that the Lloyds Banking Group’s Clerical Medical International offshore bond business was being closed to new business was seen by some as a sign of how competitive and difficult the UK market for such products has become. CMI, like a number of its rivals, sold only into the UK market, rather than internationally.
In a statement announcing its plan to withdraw from the offshore bond market, Lloyds cited “falls in new business levels as a result of intense competition” as being behind its decision.
‘Context of overall new investment inflows’
Richard Leeson, sales and marketing director for Axa Wealth International, said the 2011 sales of offshore bonds had to be seen “in the context of much larger falls in new investment inflows overall”.
“We believe that more advisers are now using offshore products, but it is against a backdrop of a retail market which has slowed due to economic uncertainty,” he said.
Like a number of other offshore bond experts interviewed, Leeson noted that there are “already signs of recovery” in the marketplace now, suggesting 2012 could see a rebound.
Phil Oxenham, marketing manager at Skandia International, concurred, noting that the instability of global stock markets last year, coupled with “an ongoing debate as to whether the additional higher tax rate of 50% will continue to apply in the UK” had contributed to a “complex 2011”, but that there were “signs for optimism” in the first few months of the year.
However, he noted that investor action can lag behind improved market confidence.
“With many investors finding the current economic climate challenging, and some still nursing losses, it can be difficult for advisers to get their wealthy clients to focus on inheritance tax planning, [which is] a core part of UK offshore bond sales,” he added.
“With new products likely to be introduced into the market in the lead up to the implementation of RDR, this may have the initial effect of slowing sales, but with further reductions in UK pension contributions being rumoured, this could have a positive effect on 2012 sales."
Paul Rutland, business development manager at Prudential, shares his colleagues’ belief in a strong link between global equity markets and UK sales of offshore bonds.
"I think we all recognise that 2011 was a turbulent period for equities, and therefore, most unitised sales obviously [would have been] under pressure, especially when compared with 2010, which was a pretty decent year for offshore bond sales,” he said.
"We should remember that offshore bond sales can be skewed by deposit rate chasers, and by providing an appropriate non-pension wrapper for a discretionary fund management service – so any change in these markets notably affects sales.”
"Also, even though the opportunities for tax deferral using offshore haven’t changed and even if the top rate of tax does fall back to 40 per cent, Trusts and higher rate taxpayers will still find the tax planning opportunities attractive."
Platform strategy at RL360°
At Royal London 360°, meanwhile, 2011 was actually a better year than 2010, according to chief executive David Kneeshaw, but he acknowledged that the UK market is not easy at the moment, and that RL360° benefits from having an established non-UK business, as well as from having a strategy “of developing relationships with platforms”.
“That is why our sales at Royal London 360° have gone up. We spent four years developing our technology links [to accommodate platforms], and I think that’s bearing fruit.”
Kneeshaw believes the UK offshore bond market will continue to prove difficult for providers in 2012, given that it is “flat at best”, and that platforms “will continue to encroach” as advisers move further in that direction, due to the platforms’ efficiency and low costs.
As for the reasons 2011 was so poor relative to 2010, Kneeshaw said that it is difficult to know for certain, with nothing but some basic sales numbers to go on.
“My guess is that, in a world which is very uncertain, which it is at the moment, people are sitting on their hands, and just leaving their money where it is for the time being.”
|
|
2010
|
2011
|
||
|
|
Single prem
|
Reg prem
|
Single prem
|
Reg prem
|
|
Q4
|
£1,621,508,000
|
£10,838,000
|
£1,211,406,000
-25.3% |
£5,300,000
-51% |
|
Total, all four quarters of year
|
£6,403,360,000
|
£36,670,000
|
£5,926,660,000
– 7.4% |
£31,938,000
-12.9% |
|
£6,440,030,000 |
£5,958,598,000 -7.48% |
|||
Source: Association of British Insurers, working from data provided by Aegon, Aviva, Axa, Canada Life, Friends Life, Legal & General, Royal London, Scottish Widows, Skandia, Standard Life, Zurich
|
2008
|
2009
|
2010
|
2011
|
|
£7,796,012,000
|
£4,648,106,000
|
£6,440,030,000
|
£5,958,598,000
|
