The warning comes as the regulatory direction continues to shift towards greater focus on good governance. The Pension Schemes Act 2021, which introduces new moral hazard powers, criminal and civil sanctions and increased powers for TPR, puts the onus on trustees and sponsors to implement strong governance and robust risk management frameworks to avoid potentially significant repercussions. The Pensions Regulator’s single code of practice, which will come into force at the end of the year, reiterates the high standards expected of pension scheme decision makers.
LCP welcomes the fact that more trustee boards and sponsors are coming alive to the benefits of engaging with behavioural risks, and how understanding them can be a powerful tool in effectively managing their strategic objectives.
LCP also believes that a key element of good governance is proactively seeking greater awareness of biases, instead of casting criticism with the benefit of hindsight which has been the case in past high profile cases. Failing to manage biases or making irrational decisions amidst the fog of groupthink could expose groups to poor outcomes.
LCP are urging pension schemes to approach identifying and addressing behavioural risk in the same way as other risks. Practical steps they recommend are:
• Add behavioural risks to your risk register.
• Get some training on the topic - 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.
Zoe Burdo, Consultant at LCP, commented: “Behavioural biases and groupthink clearly pose a relevant and timely challenge. While it might be tempting for schemes to put these issues in a ‘too big to handle’ category and focus on day to day operational and funding risks, trustees and sponsors who don’t start tackling these risks will attract increasing scrutiny. Effectively managing pension scheme risks relies on robust decision making as a foundation and failing to address behavioural risks will leave schemes vulnerable.”
Rachika Cooray, Partner and Head of Governance at LCP, added: “It’s no longer a debate: diverse boards are better at making decisions and offsetting behavioural biases such as groupthink. It’s vitally important that we close the diversity gap in trusteeship and actively encourage boards to challenge behavioural biases and strengthen decision making. Our Behavioural Insights Hub features practical tips for trustees and sponsors on how to address the challenges of diversity, inclusion and behavioural biases and aims to stimulate continued conversation on these important topics.
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