UK Pensions Could Benefit from Black Box Thinking

Report says DB plans should take best practices cues from aviation industry.

UK pension regulators should conduct constant evaluations of their mistakes, says a report from the Pensions Institute, similar to way the aviation industry uses data from “black box” flight recorders in aircraft to identify and understand the cause of major accidents.

“Too many pension schemes are making the same mistakes again and again … trustees are not good at evaluating their failures, learning from them, and sharing this knowledge,” said David Blake, director of the Pensions Institute, a UK academic research center dedicated to pension research. “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.”

The so-called “Black Box Thinking” framework was developed by Matthew Syed, a British journalist and author. Using this approach to pensions, the report, which was compiled from a series of interviews with senior trustees and industry experts, addresses the following questions:

  1. What mistakes are being made by DB trustee boards today? What are the errors that emerge in strategy setting that Black Box Thinking can be applied to?


  1. How do boards evaluate errors? Do boards have a culture of recognizing and measuring errors and are they able to learn from their mistakes to improve future decision-making?


  1. Based on the analysis, what can schemes do?

Despite calling for the application of an aviation industry technique, the report says that the UK pension industry is actually more similar to the healthcare industry. It said that despite attempts to follow best practices by seeking to identify and evaluate mistakes, interviewees reported a wide divergence in the ability of boards to learn from past mistakes.

“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,” said the report. “The pensions industry is currently characterized by a lack of measurement and hence an absence of the data to make an informed judgment.”

Examples of the Black Box approach include conducting post-mortems with lessons learned where things go wrong, and using “pre-mortems” as ways to avoid future mistakes, such as considering a new investment idea, a move in liability-driven investing, or a forthcoming valuation.

The report’s findings suggest mistakes occur “when processes that mitigate cognitive biases are absent.” It said common mistakes include focusing on what trustees know, while failing to understand what they don’t know; separating investment and funding decisions; and not challenging the sponsor’s recovery plan or dividend policy. Other miscues were having a “short-termist” attitude, and failing to recognize biases in others, such as the “career concerns” of directors who want to show that the company is doing well on their watch.

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