IFoA outlines trustee decision making best practice amid evidence of decision biases

The Institute and Faculty of Actuaries’ (IFoA) Actuarial Research Centre (Arc) has identified a number of challenges facing pension scheme decision making, warning that trustees are not immune to decision biases.

The report highlighted the findings as giving “cause for concern” about trustee judgement and decision making, noting that whilst the trustees surveyed were “honourable, hard-working and committed individuals”, they are nonetheless as vulnerable to biases in their decision making as others.

It stated that the more pressing regulatory burden placed on trustees has had "unintended consequences".

"In order to comply with the increased workloads and (at least perceptions of) greater liabilities, then a range of activities are adopted including deeper and more trusting relationships with advisors as well as a drive towards consensus style decision making to facilitate the ease of meetings," the IFoA continued.

“It is not easy to unpick the possible causes of working styles or indeed to confirm for certain if these working arrangements are harmful in practice. But at the very least they are identified as areas of legitimate concern which need to be subject to possible best practice remedies.

"There will always be a need for norms, rituals, customs and practices to work alongside formalised processes – it is impossible to formalise all activity. But both formalised processes and unspoken practices need to be regularly reviewed as they inevitably have unintended impacts on outcomes.

"The outcomes of poor pension investment decisions are far too important for millions of people for these not to be explored and understood. Our research presents a contribution to this issue, and we urge consideration of the ways in which the recommendations of this report can offer effective remedies."

In particular, the report found that member-nominated trustees showed stronger biases than employer-nominated, whilst the weakest bias was found amongst professional trustees.

It also stated that the judgments around risk appear to be “unduly influenced” by three factors: the homogeneity of the trustee board, surrogate decision making, and perceived personal liability.

In light of these challenges, it recommended employing a higher percentage or professional trustees, as well as applying more stringent requirements for selecting prospect trustees, and considering revised the training for trustees, including models on judgement bias.

It also suggested making groups more heterogeneous regarding backgrounds, and pointed to the benefits of a "devils advocate" to prevent the effect of groupthink.

However, it emphasised that whoever takes this role must be sufficiently equipped to fulfil the role effectively, noting that the resource associated with this may mean it is only appropriate for major decisions.

It stated that reducing group size of trustees were possible could help reduce potential negative effects, noting that this supports the approach of larger trustee boards to rely on smaller sub-committees for certain decisions.

In relation to issues around surrogate decisions meanwhile, it suggested making such decisions less susceptible to social acceptable bias, as well as providing feedback or examples form actual pension clients to calibrate trustee surrogate decision, or a member feedback loop to mitigate projection in subsequent decisions.

In addition to this, the research found capacity challenges amongst trustees, revealing that trustees were struggling with the amount of information to review and prepare for board meetings.

As such, it recommended that the information presented to trustees be "carefully considered” so as to avoid putting trustees under “excessive cognitive load” and influence their decision towards a suboptimal alternative, also suggesting that there may be scope for a more "targeted and focused" agenda structure.

The report also recommended that trustees receive information before advice is given to avoid being biased by early information, as well as considering guidance for advisors and fund managers as to how to present information in a user-friendly way to reduce cognitive load as much as possible.

Two aspects of board management meanwhile were identified as relevant to decision making, the role of the chair and the tendency towards consensus decision making, with a number of best practice recommendations also outlined in relation to these issues.

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