Pensions industry should adopt ‘Black Box Thinking’ approach

Trustee boards and The Pensions Regulator should adopt the Black Box Thinking approach to managing issues faced by defined benefit pension schemes, according to a new report by the Pensions Institute.

Released today (21 February 2018), Black Box Thinking focuses on issues surrounding the strength of the covenant and the huge uncertainties surrounding the UK’s 6,000 DB schemes.

The report will look at three key areas: the mistakes DB trustee boards are making, how they evaluate those errors and ways to improve.

Pensions Institute director and co-author of the report, David Blake, said: “It is clear from our research that too many pension schemes are making the same mistakes again and again. As an industry, trustees are not good at evaluating their failures, learning from them and sharing this knowledge.

“If we can emulate the open-loop ‘Black Box Thinking’ approach that the airline industry uses to such great effect, we might actually be able to address many of the issues facing DB pension schemes in the UK at the moment.

The strategy will focus on key mistakes, including the areas where trustees have little expertise or understanding, failure to challenge sponsors' recovery plans or dividend policies and a ‘short-termist’ attitude towards investment performance.

The report suggests that there is a “no industry wide approach for trustees and boards to learn from their mistakes”, in particular noting, no ownership of mistakes, inertia and herding and blaming others.

Blake added: “Examples include using post-mortems with lessons learned where things go wrong, and using pre-mortems as mechanisms for avoiding future mistakes, such as considering a new investment idea, a move in liability-driven investing, or a forthcoming valuation or enhanced transfer value exercise.

Furthermore, Blake suggests that the regulator has an important role to play as a “clearing house for post-mortems of failed schemes”.

Cardano CEO and report sponsor, Kerrin Rosenberg, said: “Many trustees have been early adopters of tried and tested risk management practices that have generated good outcomes for both their members and sponsors. However, there are also a large number who haven’t.

“Making decisions that don’t deliver the hoped for outcomes is not wrong in itself, if lessons can be learnt and shared. However, making the same poor decisions many times over is the problem. If we can create a culture of shared learning, we may be able to give the pensions industry the knowledge to avoid the mistakes of the past and of their peers.

“This exciting report presents a radical new approach that needs to be adopted quickly and effectively, so that we can move to a far more efficient governance system that is in a state of continuous improvement.”

The framework was developed by author and broadcaster Matthew Syed, emulating the aviation industry.

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