Are the authorised master trusts ready for TPR’s supervisory regime? Part 2 of 3

November 26, 2019

by Fan Jia Senior Associate

Email +44 (0)7419 538420

In the second of our series of blogs reflecting on what we have seen in the authorisation process, we discuss the running costs of a master trust (MT).

Keeping on top of the costs of running an MT could be harder than thought

As part of the authorisation process, TPR asked to see the income derived from and costs associated with running an MT. Although the income was normally relatively straightforward to quantify, forecasting costs was a lot more difficult.

This is because many MTs are run by large financial services groups who provide a wide range of products alongside their MT offering. Whereas revenue streams are separate and easily identifiable, costs are often bundled together due to various products being taken to market on the same platform and using the same resources as other parts of the wider organisation. As a result, apportioning these costs to match individual revenue streams can be a complicated process.

As part of their applications, organisations have thought carefully about what proportion of costs relate to their MT. However, this was often done for presentational purposes in the application and often there were no corresponding changes to internal reporting systems. This means that MTs could face challenges in tracking the true costs of the MT in the future. This may make it difficult to get a true view on how the MT is performing and how its performance compares to other products being offered by the same organisation. Additionally, there could be instances where a large proportion of central costs are apportioned to the MT - meaning that the MT may have limited control over its reported profitability.

Is this a big concern? Throughout the authorisation process MTs had to demonstrate that they were sustainable. TPR is satisfied that the authorised MTs have sufficient financial reserves in place to ensure members are protected in a wind up, but what actions will TPR take if these MTs start reporting unexpected losses? In addition, as organic market growth slows, competition will intensify and competition on price may place significant pressure on margins.

Many MTs have projected a relatively stable cost base while revenue grows significantly over the next few years, mainly due to the high levels of process automation thanks to technological innovation. It is unclear, however, how much efficiency could actually be achieved at the same time as delivering on customer service, member engagement and product innovation. Extra investment may be needed to enhance the capacity of their current systems and platforms. Taking on these challenges at a time when competition is growing might drive some MTs on to greater heights but some might stumble.

 

by Fan Jia Senior Associate

Email +44 (0)7419 538420

by Lisa Quarticelli Manager

Email +44 (0)7808 797418