Mike Edwards Partner, Risk Settlement Group, Aon
A buyout is now the ultimate endgame target for many pension schemes. However, for those just starting on this journey, tackling the road to pension risk settlement can seem like navigating an obstacle course. Much of this takes place around the boardroom table, navigating the mindsets of the stakeholders involved to reach agreement on the right path to take towards a common aim.
It is helpful to understand the angles from which each stakeholder may be approaching the objective. This will help to optimise your strategy and to make decisions as efficiently as possible.
There have been numerous studies on how the human brain processes information and applies logic to decision-making. Applying some of the main concepts in this area to a risk settlement initiative can be hugely beneficial in minimising time spent, reducing stress and saving money.
As we discuss below, imagine a brain divided into eight areas. Any of these eight concepts may be more prevalent in some people than others and opposing concepts can even cause conflict within one individual. Being considerate of these mindsets can help shape conversations as you progress through any project.
At the starting line, it is best to address any planning fallacy. This is the notion that projects will proceed as planned, even when similar tasks have run late. It is helpful to think of the objective as a moving target, with many routes to get to the end, and with a need to be nimble to overcome the emerging obstacles.
When considering the mindset of the stakeholders involved, it is helpful to identify any potential bias blind spots. As a trustee or a sponsor for a project, it may be natural to approach the plan from your vantage point and make decisions designed to benefit your position based on that. However, each party will naturally have their own objectives - which may not necessarily always align or may be of differing priority. Therefore, understanding the motivation for each of these objectives, and shedding light on any blindspot will allow agreement to be reached more easily and efficiently.
In contrast to this, groupthink is the idea that all stakeholders involved appear well-aligned, and in some cases, this can arise through being keen to avoid conflict, resulting in little variation in perspectives within the group. While this may have its advantages, it can lead to ideas being left unexplored which may have a more beneficial outcome on the project. Creating a diverse joint working group of company and trustee stakeholders will open a range of ideas and break away from the pack.
Then let us consider ambiguity. This can cause indecision in the most cautious among the group, as people dislike when situations are that ambiguous. Clarity on objectives and removing uncertainty, for example, via thorough data and benefit preparation can remove this hurdle.
Anchoring is much like a bungee cord pulling you back where an individual may become fixated on a plan which is based on what others have done around them, or perhaps based on a transaction structure first suggested by their adviser. It is important to recognise that, as new information comes to light, other routes may open allowing a different path to be taken. As the risk settlement market evolves, which it continues to do rapidly, new solutions emerge and there are often advantages to be gained in daring to veer from the well-trodden path and break free from the cord.
Linked to anchoring is the concept of being familiarity heuristic (a familiar rule of thumb). In new situations, individuals may be swayed by a familiar brand when it has little to do with the underlying criteria against which it should be judged. With these individuals, it may be difficult to shake them from their starting point. However, the key to this is arming them with enough advice to feel informed and to take the plunge into the open water below.
Mental accounting - humans have a tendency to think of things relative to something else, rather than in absolute terms. For example, a transaction price may seem expensive compared to another option but may be good in its own terms. Or to consider another analogy, the route may be longer, but the terrain may be smoother and more suitable for your strengths.
And finally, the pain of paying. It is most likely a familiar experience for all of us - the difficulty we experience in parting with cash when the price seems high. Understanding the true cost of any solution, while weighing up the benefits and the cost of alternatives (including the downside of opting not to transact) will help to cushion the blow of committing yourself to take part.
To learn more about these concepts and how they can help you overcome boardroom obstacles as you plan your journey to your scheme's endgame, you can find our Behavioural Insights Guide here
This post is funded by Aon
