Plane thinking

3 Apr 2018

Stephanie Hawthorne

Should trustees take a leaf out of the aviation industry’s book to help avoid schemes joining the PPF? Stephanie Hawthorne takes a look at the power of learning from your mistakes.

“It is viewing mistakes as learning opportunities that will help us to improve.”

Stefan Lundbergh, Cardano

With high street failures such as BHS and Woolworths fresh in the memory and concerns over brexit continuing to linger, protecting members’ pensions is trustees’ overarching concern. The stage then is set for a new approach to help trustees protect their members’ interests and, perhaps, prevent further schemes falling into the Pension Protection Fund. So is it time to apply black box thinking to defined benefit (DB) schemes?

Black box thinking originated in the aviation industry, where data from flight recorders is used to identify and understand the causes of major accidents and near misses. This information is then used to drive constant improvement in the safety of the industry. In 2017, through the consistent application of this approach, there was not a single passenger jet crash among the major airlines anywhere in the world.

A new report from the Pensions Institute, part of Cass Business School, has extended this framework, which was developed by author and broadcaster Matthew Syed, to manage the issues faced by the trustees and regulators of the UK’s 6,000 DB schemes.

Black box thinking suggests that when making decisions, mistakes commonly occur because trustees focus on what they know and fail to focus on areas where they have little expertise or understanding.

Mistakes appear when investment and funding decisions are separated and trustees fail to challenge the sponsor’s recovery plan or dividend policy. Other common mistakes include a short-termist attitude, especially by sponsor-appointed trustees, in respect of investment performance and hedging strategies and the failure to recognise biases in others, such as the career concerns of finance directors who need to show that the company is doing well on their watch, or of advisers who temper their advice to clients to avoid losing the contract.

The report suggests that schemes do not systematically measure mistakes. Even in schemes with clearer goals, the timescale is often so flexible that the problem can be repeatedly kicked down the road.

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, revealing and understanding mistakes – consistent with a closed loop mindset.

Professor David Blake, director of the Pensions Institute and one of the report’s authors, said: “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.”

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