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Applying Black Box thinking to DB Pension Schemes

Trustee boards and The Pensions Regulator should adopt the Black Box Thinking approach to managing issues faced by defined benefit pension schemes, according to a new report by the Pensions Institute.

A defined benefit (DB) pension scheme is one where the amount you’re paid is based on how many years you’ve worked for your employer and the salary you’ve earned.

The new approach developed by author and broadcaster 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 and, in turn, to drive constant improvement in the safety of the sector as a whole.

The report will look at three key areas: the mistakes DB trustee boards are making, how they evaluate those errors and ways to improve. These issues focus on the strength of the sponsor covenant in the light of huge uncertainties concerning asset returns, interest rates, inflation, and life expectancy. The report also suggests that there is a “no industry wide approach for trustees and boards to learn from their mistakes”, in particular noting, no ownership of mistakes, inertia and herding and blaming others.

Black Box Thinking 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. First and foremost, from the top down, there is a role for the regulator to play as a clearing house for post-mortems of failed schemes.

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.

This exciting report presents a radical new approach that needs to be adopted quickly and effectively, so that we can move to a far more efficient governance system that is in a state of continuous improvement.


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