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Trends and Best Practices for Group Decision-Making: Impact on Pension Funds

360°Benefits I News

By Matthew Glass | April 13, 2022

The significance and importance of group decisions for pension funds.

People make decisions in groups all the time. We decide which restaurant to go to with a group of friends or which movie to see with our family. Since group decisions are so common, we often do not think about the special challenges they present. However, when the stakes are higher - for example, when a pension fund board needs to make decisions about benefits for hundreds or thousands of employees - we need a more diligent approach.

Groupthink and dictators vs. wisdom of crowds

In the context of pension fund management, complex challenges frequently arise requiring decisions by the board. One common situation is that decisions often reflect the opinion of a single person, instead of reflecting opinion of the board as a group. If the opinion of the board president or recommendation of the pension fund expert always prevails, or if decisions are often informally taken before the meeting even starts, then that person may be a “dictating” decisions, effectively deciding unilaterally on behalf of the group.

A similar situation is when implicit pressure to form consensus leads to agreement without proper deliberation and debate. In this case, a “groupthink” approach to decisions may exist. Officially the decisions may be made by the group unanimously, but board members only agree because they feel the need to align with the opinion of one person or a small group.

In these situations, the pension fund board does not benefit from making decisions as a group. Pension fund boards exist to ensure their decisions reflect a diversity of opinions and consider the expertise of all representatives for better governance. By encouraging such processes of collaboration, a “wisdom of crowds” effect can help offset the undesired effects of individual decision-making. However, all too often pension fund boards do not benefit from effective group decision-making due to poor governance and ineffective processes which promote dictators or groupthink approaches.

But what are the consequences?

Pension fund decisions have significant consequences for the well-being of members. Board members regularly make decisions regarding interest credit rates, asset allocations, technical interest rates, and the level of conversion rates. Inadequate decision-making procedures can increase the risk of poor outcomes for members, either through inadequate level of benefits or increased risk of management of the pension fund.

One key area where board members may make poor decisions is when setting the investment strategy. Although board members should be prepared for the risk of market crashes leading to possible underfunding, an overly conservative investment strategy can be equally or even more detrimental to members. Without sufficient investment returns, pension funds struggle to offer interest credits and conversion rates at a level required to provide adequate benefits to members. An overly aggressive or overly conservative strategy is more likely in boards where groupthink is prevalent, or where one person effectively makes the decisions. Boards that consider a diversity of opinion and ensure that space for exchange and collaboration exist are more likely to arrive at a more balanced approach, which generally benefits more plan members being represented.

Focus on better governance

To mitigate the risk of poor decision-making due to groupthink or a dictator-approach, pension fund boards should implement better governance practices. One simple area is to implement voting procedures for key decisions. Consider a situation where a board needs to decide whether to implement an ESG (Environment, Social, and Governance) investment policy. There are two typical ways this decision can be made:

  • Traditional approach: One person states their opinion and rationale for their view, and then asks if there are any alternative views.
  • Modern approach: A survey is created that allows each board member to independently vote for their preferred option, then the results of the vote are shared with the group for discussion.

Under the traditional approach, the risk of groupthink is high. For example, initially the board president might express the view on that ESG considerations are just a fad and there is not sufficient evidence proving any benefit. If another board member immediately expresses agreement, the remaining board members are more likely to go along with the initial opinion or remain silent on the topic. The board would then decide to not implement an ESG investment policy.

Using a more modern approach, a survey can be prepared in advance that allows all board members to vote on whether to adopt an ESG investment policy. For example, before the meeting, each board member reviews pre-distributed materials discussing the pros and cons of ESG investments. The board members can then anonymously vote during the meeting on whether they believe that ESG investments are better aligned with the pension fund’s investment objectives. In this case, a very different picture may emerge. For example, although two board members may not be convinced about the benefits of ESG investments, the other board members may believe that ESG investment policies potentially have significant benefits (particularly if they are presented with reasonable alternative options as a part of the survey). Based on these voting results, the board members would likely decide as a group to take a more moderate approach and perform additional analysis of the costs and benefits before making any final decisions. Using this procedure, the board members have a better picture of all the underlying opinions and will make decisions that better reflect the views of the whole group, not just an initially vocal minority.

Voting paradoxes and the importance of debates

Adopting voting procedures for decision-making can help avoid the problems of groupthink and dictatorships, but it can lead to new problems if not implemented carefully.

Consider an example of a pension fund board with 6 members deciding whether to award increases to pensions in payment. The board has a policy stating that pensions should be increased if there is adequate funding and inflation has been sufficiently high. The board decides to vote separately on both criteria. Most of the board agree that sufficient funding is in place (4 out of 6 representatives), and most representatives believe inflation has been sufficiently high (4 out of 6). The board therefore approves a pension increase for the year.

However, if we look at the underlying preferences of each board member in this scenario, we see a more complex picture:

Table 1: Voting Paradoxes

Two different voting scenarios.
Scenario 1 – Yes! Scenario 2 – No!
Adequate funding? High inflation? Pension increase?
2 board members think… Yes Yes Yes
2 board members think… Yes No No
2 board members think… No Yes No
Total votes for… 4 (Yes!) 4 (Yes!) 2 (No!)

In this case, the voting procedure produced an outcome where most of the board members are dissatisfied with this decision. This counter-intuitive result is just one of many well-known “voting paradoxes” from Social Choice Theory in economics, and it illustrates the importance of framing decisions carefully when using group voting procedures. Furthermore, this example shows that voting is not a substitute for discussion and debate, but instead should be used as a primary tool to arrive at decisions that better reflect the views of the group.

Time constraints can lead to poor decisions-making processes

Another significant obstacle to strong decision-making is a lack of time. Often pension fund boards only meet twice a year for a few hours, and each meeting is packed with many agenda items requiring board decisions. Time constraints put pressure on the board to decide quickly with limited opportunity for debate or full consideration of all relevant issues. In this context, it is easy to automatically follow the recommendation of the expert or the opinion of the board president, effectively leading to unilateral decisions.

In some contexts, this is arguably an acceptable approach, since board members may believe “they are the experts and have always made good decisions before, so probably they are right again”. This rationale works when considering questions based entirely on matters of fact, such as the impact of awarding additional interest credits on the funding ratio. However, most key decisions made by pension fund boards have a significant political or value-based component. For example, is it fair to award pension increases to retirees who benefited from much higher conversion rates than current members receive? Because these decisions are fundamentally political or even moral, a democratic approach is more appropriate than allowing a single person to decide, regardless of expertise.

One approach to deal with time constraints and improve the efficiency of decision-making is to adopt a specific policy, such as how to set the interest credit rate or when to award pension increases. Such policies have many advantages aside from efficiency, for example, increased transparency for members and other stakeholders. However, good policies take time to develop, potentially reduce flexibility, and may not be appropriate to apply in all situations.

To best make use of the limited meeting time available, board members must review any background materials they receive and understand what decisions are required well in advance of the board meeting (e.g., at least one week before). This allows board members form independent opinions on any decisions that must be made. Without these processes in place, group decision-making will be adversely affected.

Dynamic tools in a complex environment

Difficult decisions under time pressure can lead to suboptimal outcomes. In addition, boards need to make decisions in an environment which is continuously changing, is more complex, and in which significant and severe events can immediately affect plan members.

In general, pension fund boards may make sub-optimal decisions when only a small number of fixed options are made available in a complex situation. A recent trend to address this problem is to approach decision-making in a more dynamic way. Instead of deciding between a few fixed options outlined in a presentation, the board can debate how to set key parameters live in a meeting, and the consequences for the members and financial impacts are immediately illustrated. For example, a dynamic spreadsheet could be presented at a board meeting that allows board members to immediately see the estimated impact of lowering conversion rates on the projected retirement benefits, funding level, and expected losses on retirement. Under this approach, a pension fund board can more efficiently discuss the pros and cons and arrive at a decision that best reflects the view of the whole group.


We make decisions in groups all the time, so the unique challenges of group decision-making are not always apparent. However, given the high stakes of pension fund board decisions, it is important to keep these challenges in mind and adopt best practices for dealing with decision-making as summarised below.

Principles of better decision making

  1. Use the wisdom of crowds: gather opinions of all board members independently to benefit from diversity of opinions
  2. Improve processes: Ensure that all decisions required are made available well before the meeting for discussion and preparation and make sure time for debates is encouraged
  3. Implement robust voting procedures: consider how to best frame decisions and watch out for voting “paradoxes”
  4. Consider dynamic decision support: make use of live tools that immediately show impact of various options instead of relying on static recommendations

Senior Actuarial Consultant

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