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Trustee 'groupthink' underlines need for new advisory model – SEI

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“Groupthink” is prevalent on the trustee boards of UK defined benefit pension schemes, which throws into relief the limitations of the traditional scheme governance and investment consulting model, a study sponsored by fiduciary manager SEI has found.

The findings also support the line of inquiry pursued by the UK Financial Conduct Authority (FCA) in its recently announced review of asset management, according to SEI.

Patrick Disney, managing director of SEI’s institutional group for the EMEA region said: “The Terms of Reference for the forthcoming Financial Conduct Authority review of asset management have highlighted the potential issues with the traditional investment consulting model and identified that it may be difficult for pension schemes to adequately monitor the services their consultants provide.

“Our research clearly underlines this point, revealing that more than half of trustees – 59% – do not frequently consider alternatives to the advice proposed by their investment consultant.”

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The overlap between SEI’s study and the FCA review is coincidental, however, stressed Caroline Deutsch, UK corporate marketing director at SEI.

She noted that SEI’s research was commissioned and carried out in the autumn last year.

“The premise for our study was that we didn’t think the academic theory of groupthink had ever been applied to pension scheme trustee boards before,” Deutsch told IPE. 

“We thought it would be interesting to see if groupthink exists and, if so, what the implications would be for how the governance model works and decisions are made.”

The term groupthink was coined by research psychologist Irving Janis in the 1970s, and, according to the SEI report, describes the faulty decisions made by groups when “pressures lead to a deterioration of mental efficiency, reality testing and moral judgement”.

The research was conducted by IFF Research under the supervision of Iain Clacher, associate professor in accounting and finance and co-director of the Centre for Advanced Studies in Finance (CASIF).

IFF interviewed 100 trustees of UK defined benefit schemes, 46% of which were classed as small (£15m-99m in assets under management), 33% as medium (£100m-499m) and 21% large (£500m+).

Disney said that while the existence of groupthink on trustee boards was not necessarily surprising, not least given trustees’ typical lack of investment expertise, the research threw up some stark statistics about how it manifests itself on trustee boards.

“What was interesting was being able to put a number on it, and to see that this is pretty significant,” he told IPE.

He highlighted a few statistics as particularly noteworthy:

  • Only one of the 100 trustees surveyed said they “reach their own decisions”
  • Nearly 60% do not frequently consider alternatives to an investment consultant’s recommendations
  • Nearly 80% of boards do not appoint a devil’s advocate to argue the alternative perspective to the board

The survey also reveals the consequences of groupthink, according to SEI, namely an “over-reliance on unaccountable investment consultants” and potentially a higher burden on scheme sponsors in the form of additional contributions.

SEI said trustees were not to blame for the existence of groupthink but that the problem was with the traditional investment consulting model – a “broken” model.

SEI described this as a model where advisers work in separate silos and are not directly accountable for the advice they provide, with pension schemes charged on the basis of hours worked rather than results.

“It seems clear that a more accountable advisory model is needed, where fees are based on results and the trustee board is able to clearly track the funding level against the scheme’s goals,” said Disney.

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