Trustees and sponsors must consider behavioural risks, warns LCP

Pension scheme trustees and sponsors should take risks such as groupthink and behavioural biases seriously to ensure effective decision making and good member outcomes, according to LCP.

The firm said it was highlighting the issue as regulation was shifting towards the promotion of good governance, citing Pension Schemes Act 2021’s new moral hazard powers, criminal and civil sanctions and increased powers for The Pensions Regulator, which it said put “the onus on trustees and sponsors to implement strong governance and robust risk management frameworks”.

LCP said it welcomed the fact that more trustee boards and sponsors were “coming alive to the benefits of engaging with behavioural risks”, adding that a key element of good governance was “proactively seeking greater awareness of biases, instead of casting criticism with the benefit of hindsight which has been the case in past high-profile cases”.

It recommended steps such as adding behavioural risks to a scheme’s risk register, improving board diversity, getting behavioural risk training and examining tools or aids which might add to schemes’ decision-making processes.

LCP consultant, Zoe Burdo, commented: “Behavioural biases and groupthink clearly pose a relevant and timely challenge. While it might be tempting for schemes to put these issues in a ‘too big to handle’ category and focus on day to day operational and funding risks, trustees and sponsors who don’t start tackling these risks will attract increasing scrutiny.

“Effectively managing pension scheme risks relies on robust decision making as a foundation and failing to address behavioural risks will leave schemes vulnerable.”

LCP partner and head of governance, Rachika Cooray, said: “It’s no longer a debate: diverse boards are better at making decisions and offsetting behavioural biases such as groupthink. It’s vitally important that we close the diversity gap in trusteeship and actively encourage boards to challenge behavioural biases and strengthen decision making.”

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