Could airline black box approach take off in the pensions industry?

Trustees are under more pressure than ever – and in the wake of high profile cases such as the demise of BHS and Carillion, pensions are subject to heightened scrutiny.

There’s a great tendency to try and justify your own position in the pensions industry

Hugh Nolan, Dalriada Trustees

The black box thinking framework was developed by journalist Matthew Syed. He uses the civil aviation sector as an example of an industry that has an open loop mindset towards failure, which leads to low failure rates because mistakes are systematically measured.

In the airline industry, data from black box flight recorders in aeroplanes are used to identify and evaluate the cause of major accidents and near misses to improve the safety of the sector.

Schemes must move towards open loop mindset

According to Syed, the healthcare industry is an example of a sector with closed loop thinking, and therefore characterised by high error rates.

A closed loop is where “failure doesn’t lead to progress, because information on errors and weaknesses is misinterpreted or ignored”, explains Syed in his book ‘Black Box Thinking’.

The Pensions Institute report, ‘Bringing Black Box Thinking to the Pensions Industry’, says that many trustee boards do not systematically measure mistakes. 

It found that the best schemes report and measure errors, have a culture that allows introspection about mistakes, and apply processes to identify human biases, leading over time to better outcomes.

However, “less fortunate schemes exhibit the typical behaviour of a closed loop mindset, including not setting strong measurable targets, inertia in decision-making, herding behaviour, shifting goalposts, failing to take ownership of mistakes and blaming others”, the report said.

At a conference organised by Cardano and Lincoln Pensions, director of the Pensions Institute and co-author of the report, David Blake highlighted the need for scheme 'pre-mortems', in addition to post-mortems. The latter looks back at why a mistake was made, while pre-mortems can help avoid future errors.

“The pre-mortem would be, ‘Well, let’s think about now and what it would be like in 20 years’ time and try and do something now’,” he said.

The report cited the need for a “top-down” organisation to enable sharing of information between trustees and the need for “new blood” and improved diversity in terms of board members and advisers.

It also highlighted the need for more "away days", conferences and neutral forums to facilitate discussion between trustees.

At the report’s launch event, Matthew Roy, a Pensions Institute fellow who co-authored the report, said that if he were a trustee, “I would hang out with more trustees from other organisations”, adding that “certain trustees are probably quite isolated” from other schemes and could benefit from meeting others at conferences, for example.

Could TPR perform post-mortems of failed schemes?

The report suggested that a central clearing house for post-mortems of scheme failures could improve processes, highlighting that this is something that the DB sector lacks.

It said: “The Pensions Regulator could take up this top-down role by performing post-mortems of failed schemes and making these available to all schemes.”

A spokesperson for the regulator said: “Through our DB and DC codes of practice, guidance documents including advice on covenant and integrated risk management, our 21st Century Trusteeship programme and our trustee toolkit, we are focused on using our resources to prevent problems before they arise and to ensure trustees remain the first line of defence for members."

The spokesperson added that “this is in line with our objectives to protect member benefits and the [Pension Protection Fund] while minimising the impact on the sustainable growth of employers”.

A spokesperson for the Department for Work and Pensions said: “Consumer confidence in defined benefit pension schemes has suffered a blow due to recent high-profile cases, but we are continuously reviewing the defined benefit pension sector and the vast majority of schemes are providing a secure retirement for millions of people.”

The spokesperson said that the DWP’s white paper, which will be published this spring, “will outline what reform is needed to support the sector, including the powers of the Pensions Regulator”.

Pensions industry slow to recognise psychology at play

Tim Middleton, technical consultant at the Pensions Management Institute, said that “anything which can prevent things being repeated over and over again has got to be a constructive development”.

However, he added: "It's one thing to spot a mistake after you’ve made it, it’s another to have an approach that makes you rather less likely to make them in the first place.”

Hugh Nolan, trustee representative at Dalriada Trustees, said that “there’s a great tendency to try and justify your own position”, in the pensions industry.

He added: “The pensions industry as a whole has been very slow to recognise the humanity of the people practising in it – whether that’s your members making decisions or trustees making decisions, or advisers giving advice. There’s a lot of psychology that is missed in the way we do things.”