Have you thought about behavioural risks and how they may ultimately impact outcomes for your members?  If not, you should be thinking about them . Behavioural risks can be significant, ranging from irrational decisions made by experienced boards amidst the fog of groupthink to the disproportionate influence on member or trustee decisions arising from how information is presented, or framed.

Groupthink and behavioural biases that can impact decision making aren’t new, but trustees and sponsors are becoming increasingly aware of the importance of understanding and mitigating these risks.

In a pensions management context, these risks may seem tangential or “too big to handle”, falling down the list of priorities behind funding, investment and operational risks. However, as a vital component of effective decision making, it is encouraging to see more trustee boards and sponsors coming alive to the benefits of engaging with behavioural risks, and how understanding them can be a powerful tool in effectively making decisions about managing their other high-profile risks.

We can see that the regulatory direction is also shifting, with an ever-increasing focus on good governance. The Pensions Regulator (TPR) is challenging trustees and other decision makers to proactively build more robust processes and greater awareness of their own biases, instead of receiving criticism from TPR and the media after things have gone wrong, as has been the case in the past. 

It isn’t just anecdotal – there is increasing research to support the importance of addressing behavioural risks. The Actuarial Research Centre, on behalf of the Institute and Faculty of Actuaries, recently published a study on Trustee decision making. The researchers highlighted four themes arising from the study:

• The existence of group-level biases in addition to those at the individual level.
• That trustees may put disproportionate focus in one area or scheme (such as “the tendency for trustees to focus more on their DB plans than on their DC plans”)
• The increasing onus of the trustee role.
• The potential for behavioural techniques (eg appointing a Devil’s Advocate or using methods to collect anonymous contributions) to improve decision making

What this means for trustees and sponsors is that decisions about pensions – that are high-impact, and often time pressured – are particularly susceptible to falling foul of behavioural risks. It also highlights that there are effective methods available to actively address these risks and that by better understanding behavioural risks and mitigating techniques, groups can improve the decisions they make in relation to pension schemes and retirement savings.

In future, the regulatory focus on prevention may be with more stick than carrot. New moral hazard powers, criminal and civil sanctions and increased powers for TPR put increasing onus on trustees and sponsors to implement strong governance and robust risk management frameworks. Failing to manage biases or making irrational decisions amidst the fog of groupthink could expose groups to potentially significant repercussions.

In its consultation on the new single Code of Practice earlier this year, TPR clearly set out a focus on managing increasing standards for those involved in running pension schemes and that “Trustees and scheme managers need to have the right people, skills, structures and processes in place to facilitate scheme operations, enable effective and timely decisions, and to manage risks appropriately.” Although the new draft Code of Practice, which is due to be implemented later this year doesn’t explicitly mention behavioural biases or groupthink, these clearly pose a relevant and timely challenge for trustees and sponsors who will attract increasing scrutiny for failing to address these risks.

Addressing behavioural risks doesn’t have to be daunting – one of the first steps is understanding behavioural biases and approaching them as you would any other risk, by identifying, measuring and mitigating. There are plenty of practical steps that trustees and sponsors can take, including some that can be implemented immediately:

• Add behavioural risks to your risk register.
• Get some training on these topics – we find that interactive sessions that workshop some of the management techniques are particularly powerful.
• Have an open and honest discussion amongst your group, reflecting on where signs of groupthink like self-censorship or overconfidence may have shown up in the past.
• Assess your effectiveness as a board and consider groupthink and behavioural bias as part of this review.
• Look at tools and aids you can add to your decision-making process, particularly for large projects or potentially difficult decisions – eg implementing adapted Delphi techniques through polling or anonymous contributions.
• Consider assigning a neutral facilitator to lead discussions.

At LCP we have created some practical resources you can use to proactively consider the potential impact of biases both when kicking off a project and to reflect on their impact when wrapping it up, harnessing the benefit of hindsight to encourage continuous improvement . Alongside focused training, and through tailored resources along these lines, trustees and sponsors can tackle these challenges head-on to make sure they are ahead of the curve and prepared for new regulation and guidance.

Read more about behavioural risks and explore practical tips for improving decision making on our new behavioural insights hub.