The Pensions Institute says the aviation sector's constant evaluation of mistakes to improve safety should be applied to pensions. Stephanie Baxter considers the report's findings
Is the pensions industry more like aviation or healthcare? This rather unusual question is at the heart of thought-provoking research from the Pensions Institute.
It argues the industry is too similar to the ‘closed-loop' mind-set of the health sector and should be more like aviation, which constantly evaluates mistakes to improve safety.
The report explores how this ‘black box' approach to thinking could help address many of the issues facing the UK's 6,000 defined benefit (DB) schemes and avoid the errors of the past, after finding "many schemes have a closed-loop mind-set towards failure" and make the same mistakes again and again.
This strategy, developed by author Matthew Syed, is based on the use of data from black box flight recorders in aircraft to identify and understand the cause of both major accidents and near misses.
Bringing black box thinking to the pensions industry is based on interviews with pension scheme chief executives, senior trustees, senior policy advisers, actuaries and industry association leaders.
Trial and error
Speaking on 21 February at an event held by the report's sponsors Cardano and Lincoln Pensions, Syed argued aviation is quintessentially a growth mind-set institution.
"This is recognition deep in the culture that even though we're smart, talented, and employ good behaviours and procedures that keep people safe, there's a certain sense that these are sub-optimal, and not as good as they could be."
This ‘open-loop' thinking alerts the industry to opportunities in the outside world and leverages lessons to drive change.
"Second by second, minute by minute and hour by hour the aviation industry is leveraging the lessons in order to drive a dynamic process of change."
Whereas, healthcare has a more fixed mind-set where energy is not going in to challenge and be creative.
In both sectors, lives are on the line and have talented people, but they have "fundamentally different performance outcomes".
According to the report, healthcare is a decentralised, closed-loop system that is not set up to help decision-makers admit mistakes nor to share them, which makes it more challenging to identify patterns and prevent future errors.
Syed believes the pensions industry's mind-set towards failure looks more like that of healthcare than aviation.
"The general view is there are very good things happening but there may well be a bit of fixed thinking in the pensions industry [such as] high blame and cognitive dissonance. That's why it's such a good idea to share people's honest opinions about how the industry could be doing better."
Interestingly, all the conference attendees agreed the industry's mind-set is too fixed.
Pensions Institute professor David Blake, who co-authored the report, believes the aviation sector's mind-set towards failure encourages participants to constantly challenge the status quo and experiment.
Speaking on a panel at the conference, he said there is an open-loop culture in a small number of schemes, but most have a closed-loop culture.
Black box thinking suggests information-sharing can open the loop, share best practice, and establish processes to combat human biases.
He added: "There will always be mistakes about getting the investment performance of pensions wrong, or getting the strength of the sponsor covenant wrong, but the key thing is are you learning from the strategic decisions of the mistakes you make in those contexts?"
Another issue identified in the research is apart from the change in deficit, there were few commonly agreed metrics, so trustees had trouble identifying signals from all the noise. Therefore, risk was not being measured properly and there were poor spending decisions, particularly on consultants' fees.
"Trustees weren't afraid to report mistakes, but many schemes tended not to bother as they didn't feel they owned the mistakes. A scheme deficit could be blamed on interest rates rather than the failure of the scheme to have hedged interest rates at an earlier opportunity."
This lack of responsibility is what Blake calls a "blaming culture", which is "classic closed-loop thinking" and leads to a state of denial about a mistake and can have very negative consequences.
Indeed, one interviewee said trustee boards "are not willing to admit mistakes because it would show they are responsible".
Blake said there was also evidence of "agents not pointing out mistakes, because of wanting to massage the egos of trustees such that no one was responsible", and the DB sector over-relying on The Pensions Regulator for direction.
So what can trustees take from black box thinking to improve their day-to-day activities?
The report suggests actions boards can take from the bottom-up to adopt a more open-loop attitude. For example, regular appointment of new board members and advisers; improving the diversity of boards and their advisers; sympathetic advisers sharing best practice experience; conferences and forums; and administrative pooling arrangements and consolidation. The regulator could have a top-down role as a clearinghouse of information to provide post-mortems of failed schemes.
Blake also advocates ‘pre-mortems' to avoid future mistakes. This would be "not about what could go wrong, but play the game of what did go wrong with something we might try in the future."
The report concludes with Syed's argument that all strong systems share an essential pattern - "an adaptive process driven by detection and response to failure". This could be a good place to start.
This week’s top stories included the rejection of an automatic guidance amendment in the Pension Schemes Bill, while The Pensions Regulator posted a sharp increase in the use of its powers.
The majority of the pensions industry agrees an eventual net-zero target should not be mandated for schemes as part of the Pension Schemes Bill, according to a Professional Pensions poll.
Defined benefit (DB) schemes that provide GMPs must revisit and, where necessary, top-up historic cash equivalent transfer values (CETVs) that have been calculated on an unequal basis, a landmark court judgment says today.
Regulators must act now to impose some "proper regulation" to stop another defined benefit (DB) transfer advice disaster, saysTim Sargisson.
Opportunities for defined benefit (DB) schemes to pursue investment approaches that help repair the UK’s economy cannot stand in the way of improving member outcomes, Aegon says.