Investment Bonds - UK - February 2008

Table of Contents

• Issues in the Market
• Key issues
• Market background and definitions
• Investment risk
  • Figure 1: Risk profile of selected savings and investments
• A cautionary note about the term ' bond'
• Investment bonds from life offices
• The smoothing effect of with-profits bonds
• Market Value Reduction (MVR)
• Closed funds
• Taxation
• Tax-related concepts and products
• Abbreviations
• Market in Brief
• Volume sales finally rising but market still shadow of former self
  • Figure 2: Total number of new single-premium investment bond contacts and value of new premiums, 2001-07
• Shifting product preferences
  • Figure 3: Proportional distribution of investment bond sales by main product type, based on new premiums, 2001-07**
• Stock market performance impacts investment bond popularity
• IFAs main channel of distribution
• Industry still suffers from Image problems
• Older and more affluent population will expand the target market
• CGT changes a threat but not the end of investment bonds
• Investment bond ownership a minority pursuit
  • Figure 4: Ownership of savings and investment products, by type, November 2007
• Collectives pose biggest competitive threat
• Internal Market Environment
• Key Points
• Investor confidence
• Understanding the investment
• Complicated charging structure doesn' t help
• High commissions may lead to mis-selling
• Negative media has hurt confidence in investment bond market
• The downfall of with-profits...
• ...and the precipice bond predicament
• Regulatory developments
• Changes in Capital Gains Tax a threat...
• ...but not all doom and gloom
• FSA putting pressure on advisors...
• ...and the providers of with-profits funds
• Attempts to make with-profits more transparent
• Increased regulation has lead to the use CPPI Funds
• Broader Market Environment
• Key Points
• Ageing population expands target market
  • Figure 5: UK population, by age band, 2006-12 (two-year intervals)
• Inheritances good for investment bond business
• More tax payers falling into higher tax bracket
  • Figure 6: Number of basic and higher rate taxpayers, 1999-2000-2007-08
• More funds available for investing
  • Figure 7: Total PDI, consumer expenditure, savings and the savings ratio, at constant prices, 2002-12
• Stock market performance and investment bonds
  • Figure 8: FTSE 100 and FTSE All Share -- daily index movements, December 1999-December 2007
• Falling base rate may help boost demand of more aggressive policies
• Figure 9: Changes in the bank base interest rate, January 1998-February 2008
• Inflationary pressures
• Consumer Context
• Key Points
• Consumers in defensive mood after Christmas
  • Figure 10: Savings, investment, borrowing and debt repayment -- consumers' expected activity, Dec 2006-Dec 2007
• Overall activity levels 12% below long-term average
  • Figure 11: Expected financial activity, by socio-demographic and income groups, December 2007 and average for the last 23 quarters
• Investor sentiment continues to weaken going into 2008
  • Figure 12: Intended purchases of shares and equity based unit trusts, Government and corporate bonds and bond-based unit trusts* and sales of equities and unit trusts over the period Q3/Q4 2002-Q3/Q4 2007
• Competitive Context
• Key Points
• Collective Investments are the main alternative
  • Figure 13: Retail sales of unit trusts and OEICs by IMA members, 1996-2007
• ISAs are the rival wrap
  • Figure 14: ISA sales, by type of ISA, 2001/02-06/07
• NS&I savings products benefit from growing uncertainty
  • Figure 15: Amounts invested in NS&I annually and total funds held, 2001-02-2006-07
• UK property obsession another alternative
  • Figure 16: Investment ownership, June 2007
• Buy-to-let market party might be broken up in 2008
  • Figure 17: Size of the buy-to-let market, 2000-07 (H1)
• Strengths and Weaknesses in the Market
• Market strengths
• Product flexibility and tax advantages
• Ageing population and growth in wealth
• Increased focus on saving
• Offshore investment bonds continue develop
• Market weaknesses
• Changes in capital gains treatment
• Limited scope for expanding beyond the main target market
• Low levels of product knowledge
• With-profits demise still gives the industry a bad image
• Market Size and Forecast
• Key Points
• Volume sales finally rising but market still shadow of former self
  • Figure 18: Total number of new single-premium investment bond contacts and value of new premiums, 2001-07
• Future prospects challenging
• Forecast
  • Figure 19: Forecast of the total value of new premiums of single-premium investment bonds, 2002-12
• Factors incorporated
• Market Segmentation
• Key Points
• Shifting product preferences
  • Figure 20: Proportional distribution of investment bond sales by main product type, based on new premiums, 2001-07**
• With-profits have seen minimal growth after hitting bottom in 2005
  • Figure 21: New with-profits bond sales, 2001-07
• Unit-linked bonds new sales take a dip
  • Figure 22: New unit-linked bond sales, 2001-07
• Distribution bond value sales continue to rise
  • Figure 23: New distribution bond sales, 2001-07
• Slowdown in demand for guaranteed equity bonds
  • Figure 24: New guaranteed equity bond sales, 2001-07
• Income and growth bonds see a massive increase in value sales
  • Figure 25: New sales other bonds**, 2001-07
• Market Share
• Key Points
• Halifax Life tops the table for single-premium life sales
  • Figure 26: New premium income from single-premium life policies, by selected provider, 2004-06
• Unit-linked bonds drive growth for top providers
  • Figure 27: New premium income from single-premium unit-linked life policies, by selected provider, 2004-06
• Companies and Products
• Key Points
• Offshore business continues to expand and develop
• A couple of providers are shifting their focus
• Small players outperform big firms in with-profits bonds
• Importance of a strong Equity Backing Ratio (EBR)
  • Figure 28: 5 year performance of select with-profits providers according to EBR
• Norwich Union latest to say bye-bye to MVRs
• Few providers increasing annual bonuses
• But some are paying hefty final bonuses
• Norwich Union plans controversial with-profits policy windfall payouts
• Brand Communication and Promotion
• Key Points
• Bond adspend down 40% in 2007
  • Figure 29: Total advertising expenditure on bonds, by sub-category, year to November 2003-07
• Press dominates adspend
  • Figure 30: Advertising expenditure on bonds, by media type, year to November 2007
• Absence of investment bond providers at the top of the adspend table
  • Figure 31: Top ten bond advertisers, year to November 2003-07
• Channels to Market
• Key Points
• IFAs main channel of distribution
  • Figure 32: Investment bond distribution mix based on new premiums, 2003-07
• Guaranteed equity bonds are not sold via IFAs
• Single-tie overtakes IFAs as main channel for distribution bonds
• Majority of IFAs not touching with-profits bonds
• Most unit-linked bonds sold via an intermediary
  • Figure 33: Unit-linked bonds distribution mix based on new premiums, 2003-07
• Fund supermarkets a useful tool for investors
• The Consumer: Product Ownership
• Key Points
• Investment bond ownership a minority pursuit
  • Figure 34: Ownership of savings and investment products, by type, November 2007
• Investment bond holders likely to hold a diverse range of product types
  • Figure 35: Cross analysis of ownership, by selected type of savings/investment product
• Investment bonds attractive to those approaching retirement
  • Figure 36: Ownership of select savings and investment products, by gender, age, marital status, and lifestage, November 2007
• Affluent and wealthy can take advantage of the tax benefits
  • Figure 37: Ownership of select savings and investment products, by socio-economic group, working status, gross annual household income and acorn group, November 2007
• Media usage and investing
  • Figure 38: Ownership of select savings and investment products, by newspaper readership, technology usage and Internet usage, November 2007