Sarah Godfrey talks to Prudential International's Richard Leeson about some of the challenges he sees on the horizon for the offshore market
When International Investment caught up with Richard Leeson in June (though perhaps 'caught up with' is not the most appropriate phrase), the head of business development at Prudential International was preparing to run the West Highland Way. A non-stop, 96-mile race through uneven terrain with a 35-hour time limit on pain of disqualification, this was, says Leeson, a considerable challenge.
The offshore life market has also had its share of - albeit less physical - challenges so far this year, chief among them the need to adapt to a UK tax system that arguably skews the playing field away from the offshore bonds on which so much of its business is based. But Leeson says the main challenge for the international arm of the Pru is the same as it has ever been.
"The biggest challenge is the same as always: to educate as many IFAs as we can on the benefits of offshore investing, and ensure they fully understand the key messages. This perhaps has greater poignancy since the Budget, which confirmed the changes to capital gains tax proposed in last year's pre-Budget report.
"There has been an element of IFAs reviewing their position regarding investment bonds and collective investments. They are looking for reassurance as to where offshore bonds sit."
Leeson points out that around 3,000 IFA firms - or about 20-25% of the total market - write offshore business. If they were to turn away from the sector, it would obviously be bad news for the life offices.
But not all the recent tinkering with the UK's tax system is to the detriment of the offshore industry. Leeson points to the huge increase in personal allowances for over-65s, who can now receive far more income before they are taxed on it. "That's a huge potential new market, and a massive opportunity for IFAs who might not have looked at the offshore bond market before," he says.
To help meet the continuing challenge of bringing the offshore message to the intermediary market, Prudential International has just established an offshore specialist sales team that is split into three regions covering the North, the Midlands and the South of England.
"They go out with our tied salespeople and support our telephone sales teams," says Leeson. "They have been undertaking workshops, seminars and presentations, and trying to reach the widest audience possible."
This may all seem a bit UK-centric, but that is perhaps unsurprising, as the UK market represents more than half of Prudential International's new business. The firm is currently active in the UK, Channel Islands, Isle of Man, Austria, Germany and, to a lesser extent, Belgium.
"Traditionally, we have always written more offshore business outside the UK than in," explains Leeson, "but so far this year, that has turned around, and UK sales are outstripping those in Europe. UK sales outperformed Europe in the first quarter, and continued to do so in Q2."
Part of this could be attributable to the launch of Pru's open-architecture Portfolio Account in April, though Leeson says this would not have affected the Q1 figures. The International Prudence Bond, the firm's core insured-fund offering, has also been doing well, he says.
Both these products are run from Prudential International's Dublin base. Asked why Pru had chosen Dublin over the more traditional offshore life base of the Isle of Man, Leeson says it was all to do with timing.
"A lot of choices depend on when the company was launched, and many of the early companies in the offshore life market launched 20 or more years ago, when the Isle of Man was probably the most attractive location for a base - it was English-speaking and had an Anglo-Saxon legal system, and it was easy to find competent people there," he says.
"It was not until quite recently that the Irish authorities chose to promote Dublin as a centre of excellence. Until then, Dublin would not have been a natural choice. But since then, it has become the jurisdiction of choice for all the new entrants to the market, such as Legal & General International just last year. I can't remember when there was last a new launch in the Isle of Man."
Leeson goes so far as to say that perhaps the Isle of Man companies would consider opening a Dublin office in the future. "Ireland has the benefits of EU membership, but it goes further than that," he says. "There is a larger pool of talent, whereas the Isle of Man is more restricted and, in infrastructure terms, getting to and from Dublin is easier. The corporate tax structure also makes Dublin an attractive proposition."
The combination of changes to the UK tax system and a global financial environment as difficult as many of us can remember has thrown up some interesting points for both the industry and investors to consider. Among these are the place of cash in a portfolio, and whether investors should consider splitting their wrappers - for instance, holding income-producing investments in an offshore bond and growth investments directly. Leeson feels the latter is something of a red herring.
"The danger with that approach is it relies wholly on tax-driven considerations," he says. "It takes no account of flexibility or any other matters of suitability. If it was really all about tax, the only investment that would ever be recommended is an Enterprise Investment Scheme.
"Whether an offshore bond is the right investment is about other factors, such as having the flexibility to meet changes in lifestyle; it's not as simple as tax and tax only."
Despite anecdotal evidence that the vast majority of new investment into offshore bonds is sitting in cash (see News, page 8), Leeson does not think there has been a structural shift in terms of risk attitudes. "The past six to nine months have been unique, and it has been difficult for clients and IFAs to choose suitable asset classes," he says.
"Property has come off its peak, equities have fallen from their recent highs, fixed interest offers poor value in almost every geography - that has been the driver for the volume of cash-related business. Going forward, we are experiencing a higher-inflation environment, and traditionally, cash does not keep pace in those times.
"We are now seeing IFAs and their clients starting to revisit those portfolios; there is beginning to be a move away from cash, albeit in a piecemeal fashion, as many funds are now looking good value on a historical basis."
Looking ahead, Leeson says guided architecture will be among the new product choices set to launch in the third and fourth quarters of 2008.
"We're excited about that," he says. "It fills a gap between the open architecture of portfolio bonds - where either the IFA chooses the investments or outsources the choice to a third-party manager - and those IFAs who are happy to use the internal funds. We are looking at plugging the gap in the middle with a range of funds recommended by a third party.
"We are also looking at the possibility of guaranteed funds, and there is the perennial 'third way' - can we use our product range to enhance the range of options for clients approaching retirement in terms of income, and can we leverage those benefits in terms of European markets?"
New markets in Europe could also be on the agenda, as well as the Middle East, though Leeson says Prudential International will not be going after a slice of the Southeast Asian market. "Prudential is in a completely different situation from many of the other life offices, in that we have a significant operation in Southeast Asia already through Prudential Asia, where we have enormous market share among the indigenous populations," he says.
"Areas like the Middle East and other European markets will always be attractive, and we are keeping an eye on various markets to see if there are opportunities to use our strengths and skills, achieve the necessary margins and provide suitable products for the investment climate in those areas.
"I can't see any expansion in the immediate future, but in the medium term, we are keeping a watching brief."
In the meantime, Leeson had that race to focus on. Running in aid of Cancer Research UK (if you wish to donate, please see www.justgiving.com/richardleeson), he was hoping to finish in roughly 26 to 28 hours, though given that over a third of the competitors usually fail to finish at all, he was happy just to be able to make it to the end within the time limit.
"It's the biggest challenge I've ever faced - even more than my target this year!" he says.
Leeson crossed the finish line at Fort William, Scotland, on the morning of Sunday 22 June, a little over 30 hours after starting the race.
Now, on to that other target ...
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From 1 March