Safeguarding against unknowns and preparing for black swans

Pardon the Interruption

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This week, I had the pleasure of attending the AMNT Winter Conference: Challenging Times Ahead for Trustees in 2020.
 
It was a fantastic line-up of speakers, covering topics including upcoming legislation, regulation, scheme funding, master trusts, the buyout market, climate and risks for trustees, and member communications.
 
I was joined on the panel by two experts: Sukhi Randhawa (Willis Towers Watson) and Bob Scott (LCP). 
 
I highlighted the following three challenges / risks:
 
  1. Climate: there is no doubt in my mind that this is the most pressing issue facing trustees. Climate is a theme that was addressed in almost every talk.  Action is required now, and there are simple things trustees can do, like ask, “What is the impact on the climate?” for each and every investment that is proposed. Check out the mallowstreet Climate Charter for more details.
  2. Long-Term Funding: for DB pension funds, how trustees adapt their investment strategies in the ‘lower for longer’ environment is essential to ensure that all members receive their benefits in full. For DC, we had a discussion around contributions and choice. I argued the employer will need to take the lead on this, as the last thing anyone wants is millions of people sleepwalking, unknowingly, into retirement poverty. Click here for more info
  3. Diversity: cognitive diversity is as essential as building more diverse trustee boards. How do we avoid group think, and do we have enough different backgrounds (frames of reference) to ask questions and challenge others in their thinking? The importance of having cognitive diversity should not be underestimated.
 
I’m reminded what one of my Chinese clients recently told me on a call at the end of last year, in early December (before coronavirus). She said: “Stuart – I can guarantee one thing. The next global recession will be caused by something that is unexpected, and wasn’t on anyone’s radar.”
 
And that’s the biggest risk – the unknowns that are lurking out there.
 
Pension funds should focus on ‘controlling what is controllable’ – addressing the known risks and challenges to ensure they are well positioned to eventually pay all member benefits.  

From this solid foundation, they will be in a position to deal with the ‘unknowns’ or ‘black swans’ as they appear. Which they most certainly will.  I guess uncertainty is the only thing that is certain in today’s environment.