A report from the Pensions Institute, part of Cass Business School, suggests ways in which the pensions industry might better deal with failed schemes by sharing key learnings from scheme failures.

This could be done effectively if an independent body such as The Pensions Regulator (TPR) were to publish an ‘autopsy’ on the failure for other schemes and their trustees to learn from, in a similar way the airline industry uses data from ‘black box’ flight recorders to understand crashes and near misses.

The researchers say the pensions industry is currently characterised by a lack of measurement and hence an absence of the data to make an informed judgement. In assessing errors, with the exception of quantitative information on fund deficits, there are few, if any, yardsticks that can be used to measure mistakes in DB pension schemes in the same way that mortality is used in aviation.

Professor David Blake, director of the Pensions Institute, and one of the authors of the report, 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’.

Blake said 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.

‘There is also an important role for the regulator to play as a clearing house for post-mortems of failed schemes and the lessons that can be learned,’ he said. 

Among the problems identified are trustees focusing solely on areas where they are knowledgeable; the separation of investment and funding decisions, and the failure to challenge the sponsor’s recovery plan or dividend policy; a short-termist attitude; failing to recognise biases in others; and becoming distracted from the main focus.

The report suggests that schemes do not systematically measure mistakes, although there are individual examples of best practice. Issues raised include an absence of long-term strategy and a realistic timetable; information overload; risk not being measured; and poor spending decisions, particularly on consultants fees.

The report goes on to highlight that there is no industry-wide approach for trustees and boards to learn from their mistakes, with many boards not having a culture of seeking out and revealing mistakes. It suggests that information sharing is an effective means of addressing many of the problems facing schemes: opening up routes that trustees can acquire and share best practices themselves.

Bringing Black Box Thinking to the Pensions Industry is here.

Report by Pat Sweet