By Patrick Disney
How often do you challenge the decisions of your investment consultant? Does your trustee board use a devil’s advocate to check investment decisions? With the forthcoming Financial Conduct Authority (FCA) review into the asset management industry placing the traditional investment consulting model under the spotlight, these are just some of the questions trustees should be asking themselves in order to elicit the best out of their investment strategy for scheme members.
Recent research commissioned by SEI has underlined these problems, demonstrating how few trustees question the advice of their consultants. So-called ‘groupthink’ is often prevalent amongst the trustees of defined benefit pension schemes. This phenomenon is hindering the decision-making process and possibly increasing the financial demands on employers.
Groupthink – a term coined by research psychologist Irving Janis – refers to a phenomenon where a marked consensus of opinion amongst groups is formulated and rarely, if ever challenged. It can lead to a lack of critical reasoning and evaluation of viable alternative options. Instrumental to the consensus being reached is a reliance on the most vocal, seemingly authoritative participants of a group; in the DB scheme market, this role tends to be filled by investment consultants.
In undertaking this research, we sought the expertise of a specialist in behavioural economics, Dr. Iain Clacher of Leeds University Business School. Under his guidance 100 trustees of UK DB schemes were interviewed via telephone by a leading research agency, IFF. Of those surveyed, 46% were classified as small (£15m – £99m AUM), 33% medium (£100m – £499m AUM), and 21% were large schemes (£500m+).
The research suggests that groupthink is constraining trustees, discouraging them from challenging the advice of their consultants and thereby affecting decision making and governance. Forty-two percent of the trustees interviewed had never challenged their advisers and nearly 60% infrequently consider alternatives to the consultant’s recommendations. Only one of the 100 trustees interviewed said that they reached their own decisions.
This heavy reliance on investment consultants needs to be understood in the context of the traditional consulting model where consultants charge an hourly fee. It can be argued that this consultancy approach, which is not based on results, can lead to a lack of alignment with pension scheme goals and a less collaborative working relationship.
The research also found that the ramifications of groupthink may increase the financial burden on employers. Forty-one percent of schemes surveyed have had to increase their employer contributions in the last five years because of underperformance against the benchmark. Of these, the average increase in contributions was 22%. Moreover, one third of trustees cited poor processes as the biggest barrier to improved performance.
Given groupthink’s detrimental effect on scheme governance, how can trustees minimise the potential for this dynamic to exist in the decisions they make?
Trustees should start by ensuring that the scheme’s board is a place where decisions are challenged and debated, setting the scene for healthy dialogue where the views and opinions of others are considered fairly and without prejudice.
Secondly, the appointment of a board member as a ‘devil’s advocate’ can stimulate discussion on investment decisions, helping to ensure that any advice from the consultant is thoroughly probed and debated.
Alternative views should be also sought from other experts, such as an independent trustee, especially in cases where trustees lack a strong knowledge of investing, to challenge the expertise of the consultant.
While the above will help to introduce good practice, it must be emphasised that it is unlikely groupthink will ever be fully overcome. The phenomenon exists to varying degrees in all groups, committees and boards, but its impact can be mitigated by ensuring that advisers are accountable. The FCA’s review into asset management comes at an interesting time for DB pension schemes, and it’s likely to place the role of investment consultants under increased scrutiny. The key question that needs to be asked is whether the current consulting model is fit for purpose.
Patrick Disney is head of SEI’s Institutional Group – Europe, the Middle East and Africa (EMEA)
