How scenario planning can benefit a Pension Trustee Board

Nov 15, 2018

To teach how to live without certainty and yet without being paralysed by hesitation

Bertrand Russel

What is scenario planning and how can it benefit your Pension scheme?

Scenario planning goes much further than risk management or contingency planning. It aims to capture a whole range of future possibilities in rich detail. By identifying basic trends and uncertainties, your Pension board can create a series of scenarios that will help make the best decisions for the scheme and its benefactors. The challenge is in identifying the scenarios without being constrained by what we think and believe today. History is littered with examples of people who haven’t been able to see the future such as these gems:

Heavier-than-air flying machines are impossible.

Lord Kelvin, British mathematician, physicist, and president of the British Royal Society, c.1895

I think there is a world market for about five computers.

Thomas J. Watson, chairman of IBM, 1943

They couldn’t hit an elephant at this dist . . .

General John B. Sedgwick, last words, Battle of Spotsylvania, 1864

It now seems ludicrous that they couldn’t see what is so obvious to us now, but it was probably as hard for them to evaluate the effect of new innovations then as it is for us to assess the impact over the next decades of multimedia, the human genome project, biotechnology, artificial intelligence, organ transplants, superconductivity, space colonization, and myriad other developments. Who foresaw what the iPhone would do our world since 2007 (apart from Apple?). And that is the challenge – is to try and identify those scenarios that might not seem possible now, but could be in the future and could impact your Pension scheme.

Reasons you might need scenario planning

If your board struggles with any of the below, it may be a good time to think about scenario planning

  • Your board is living through a state of high uncertainty
  • You’ve had too many costly surprises in the past.
  • The Pension board does not perceive or generate new opportunities.
  • The quality of strategic thinking is low (i.e., too routinised or bureaucratic).
  • There are strong differences of opinion within the board that need to be considered

What sorts of scenarios do you need to be thinking through?

  • What if our employer is taken over? – thinking through who might buy it and the different scenarios dependent on who buys it. Would you for example have to change your investment strategy because the covenant is weaker?
  • The world economy crashes – what might you need to do to your investment strategy
  • Changes in pensions regulations

The difficulty with scenario planning

The challenges you face with scenario planning include:

Over confidence and tunnel vision

It couldn’t happen to us, or it’s always been done this way, so why change it? (see the above quotes for how well that worked).

Group think

This is where there a dominant leader or self-confirming group have a strong and one-sided opinion and it’s forced on the rest of the group without considering whether the opinions are right. Combined with over confidence and tunnel vision it can constrain broad and creative thinking.

Confirmation bias

There is a natural tendency to seek out information that confirms our vision of possible developments in the world. Social media is an excellent example of this as it feed us the information confirming our views based on what we view and comment on. It can result in you creating a limited set of scenarios relating to the world vision that you already hold.

But what we really want is to think of other worlds and different views.

Stability leads to instability. The more stable things become and the longer things are stable, the more unstable they will be when the crisis hits.

Hyman Minsky

Pension Boards who can expand their imaginations to see a wider range of possible futures will be much better positioned to take advantage of the unexpected opportunities that will come along.

How to avoid these pitfalls

Group diversity

Having a variety of people on your board is crucial throughout the entire process of scenario development. There is plenty of research which shows that to get the best broad, mental mindset expanding scenarios you need to be working with a wide group of people from various disciplines. From this, it seems clear that you shouldn’t limit yourself to the board members. You should ask your advisers, industry experts and so on to broaden your horizons. It’s also one of the reasons why it’s so beneficial to have an independent Pension Trustee on your board. They bring broad experience of many other pension boards who have come up with innovative solutions to challenges.

Scenario planning tools

Having got the right mix of people, how do you make sure you come up with the best scenarios? There are several different methods and tools you can use to ensure, such as

  • Effective group dynamics
  • A rich flow of different scenarios

The Delphi method uses iterative rounds and anonymous opinions and which stops convergence towards a ‘narrow vision’ under group pressure.

Another tool that is useful to develop unexpected (in particular, negative impact) scenarios is the Pre-Mortem Analysis. You write down why a particular decision (or just the current situation without decision or change) eventually leads to the demise of the company in one, two or five years.

A successful and well documented example of recognising signals is the adaptive policy pursued by the Shell Corporation in the1970s. Having already worked with scenario thinking in a structural manner for some time, Shell had already devised a scenario – however unlikely – under which there was a dramatic change in the supply side of the oil market.

The company was able to respond quickly when the oil market was actually confronted with a drop in supply (the OPEC impact). As it occurred, Shell recognised the supply scenario, despite the company not having exactly anticipated that there would be a cartel along the lines of OPEC, and lived through it. When faced with the threat of supply restrictions, the company was able to reduce their refinery production significantly rather than continuing to grow based on the assumption that this challenge would be but a brief interruption.

Source: Cardano Memento Futuri White

By having properly lived through the scenarios, it will feel as if the future is being relived – Déjà vu all over again. Imagining in advance how the best action can be taken in the event of particular developments prevents decision apathy

 Theo Kocken

An excellent article on scenario planning can be found here

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If you’d like to discuss how scenario planning might help your board, please call or email us 

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