Tag: pensions

One minute guide to real-world AI implementation 

McKinsey just published an excellent and comprehensive paper covering how Artificial Intelligence (AI) can deliver real value for business.

tl;dr

The only issue – at 80 pages it’s a lot to read.

A lot of the use cases focus on retail, energy and education, one angle I find particularly are the read-across of these examples into service based and business-to-business environments. There are definitely some relevant points that could map to a services/B2B worlds: for example the automation of admin tasks for teaches, more targeted sales and marketing and more personalised customer service.

Here’s my take on the key points from the document:

1. No shortcuts: first data & digital, then AI

AI becomes impactful when it has access to large amounts of high-quality data and is integrated into automated work processes. AI is not a shortcut to these digital foundations. Rather, it is a powerful extension of them.

The firs thing firm’s need to do is come up with a real business case for AI that relates to the firm’s strategy, this requires separating the hype and buzz around AI from its actual capabilities in a specific, real-world context. It includes a realistic view of AI’s capabilities and an honest accounting of its limitations, which requires at least a high-level grasp of how AI works and how it differs from conventional technological approaches.
Each new generation of tech builds on the previous one – this suggests AI can deliver significant competitive advantages, but only for firms that are fully committed to it. Take any ingredient away—a strong digital starting point, serious adoption of AI, or a proactive strategic posture—and profit margins are much less impressive. This is consistent with McKinsey findings in the broader digital space.
Technology is a tool and in itself does not deliver competitiveness improvements.

2. Areas to focus on to create real value: project, produce, promote or provide 

To fulfil the expectations being heaped upon it, AI will need to deliver economic applications that significantly reduce costs, increase revenue, and enhance asset utilization.

Mckinsey categorized the ways in which AI can create value in four areas:(1) enabling companies to better project and forecast to anticipate demand, optimize R&D, and improve sourcing; (2) increasing companies’ ability to produce goods and services at lower cost and higher quality; (3) helping promote offerings at the right price, with the right message, and to the right target customers; and (4) allowing them to provide rich, personal, and convenient
user experiences

3. Data ecosystem & staff culture to the fore 

Firms must conduct sensible analysis of what the most valuable AI use cases are. They should also build out the supporting digital assets and capabilities. Indeed, the core elements of a successful AI transformation are the same as those for data and analytics generally. This includes building the data ecosystem, adopting the right techniques and tools, integrating technology into workplace processes, and adopting an open, collaborative culture while reskilling the workforce

4. Take a portfolio approach focused on use cases in short, medium and long term, be lean, fail fast & learn

A portfolio-based approach to AI adoption cases, looking at use cases over a one- to five-year horizon, can be helpful.

In the immediate future, McKinsey suggest a focus on use cases where there are proven technology solutions today that can be adopted at scale, such as robotic process automation and some applications of machine learning. Further out, identify use cases where a technology is emerging but not yet proven at scale. Over the longer term, McKinsey’s view is to pick one or two high-impact but unproven use cases and partner with academia or other third parties to innovate, gaining a potential first-mover advantage in the future. Across all horizons, a “test and learn” approach can help validate the business case, conducting time-limited experiments to see what really works and then scaling up successes. Fast, agile approaches are important.

5. Don’t be a hammer in search of a nail … 

To ensure a focus on the most valuable use cases, AI initiatives should be assessed and co-led by both business and technical leaders. Given the significant advancements in AI technologies in recent years, there is a tendency to compartmentalize accountability for AI with functional leaders in IT, digital, or innovation. This can result in a “hammer in search of a nail” outcome, or technologies being rolled out without compelling use cases. The orientation should be the opposite: business led and value focused. This business-led approach follows successful adoption approaches in other digital waves such as mobile, social, and analytics.

McKinsey graphics on AI:

Why a Focus on Personality Matters for a Better Pensions Team

I really enjoyed this fantastic article which featured in the March issue of Harvard Business Review, and explores the Deloitte Business Chemistry model in relation to trying to understand differing work styles and team dynamics. I’d definitely recommend reading the article in full if you haven’t already.

Pensions

It got me wondering – how might these insights apply to pensions? After all, taking decisions, making progress and enacting change within a DB pension fund involves a huge team effort between trustees, corporate sponsor, in house pensions teams and advisors. In many cases there can be big differences in style and approach between these groups and even individuals within the same group. These differences could derail effective decision making, or they could enhance it.

What is the Deloitte Business Chemistry model?

The Model is based around identifying four different personality styles relevant to teamwork. The purpose of this isn’t to “pigeonhole” individuals but rather to identify a common language that helps everyone understand the differences between them, and appreciate the potential sources of tension (both positive and negative). It also gives some actionable takeaways that you can start thinking about straight away.

I’d encourage you to read the whole article but here is a summary of the four styles:

Pioneers value possibilities, and they spark energy and imagination on their teams. They believe risks are worth taking and that it’s fine to go with your gut. Their focus is big-picture. They’re drawn to bold new ideas and creative approaches.
Guardians value stability, and they bring order and rigor. They’re pragmatic, and they hesitate to embrace risk. Data and facts are baseline requirements for them, and details matter. Guardians think it makes sense to learn from the past.
Drivers value challenge and generate momentum. Getting results and winning count most. Drivers tend to view issues as black-and-white and tackle problems head on, armed with logic and data.
Integrators value connection and draw teams together. Relationships and responsibility to the group are paramount. Integrators tend to believe that most things are relative. They’re diplomatic and focused on gaining consensus.

Source: Harvard Business Review

 

The challenge in allowing these diverse styles to work together most effectively are the big differences in what energises and alienates each group. For example integrators dislike conflict, but drivers love a solid debate. Also the style in which each group prefers to think and contribute varies greatly: a guardian is likely to want to step through a plan line by line, for a pioneer this might feel quite painful. This has real consequences for situations where differing styles interact.

You’ve probably already recognised elements of your colleagues’ styles in the descriptions above, but what might this mean for running a pension fund?

It’s easy to see how these differing styles might be present around the meeting room of a typical DB pension fund trustee board. Starting with trustees themselves – the connotation of the word “trustee” in English is similar to “guardian” – even though the role of the modern day trustee is much wider than that – and many trustees approach their role with the mindset and style of a guardian (for all the right reasons). They want to see data and facts before taking any decisions that might expose their members to risk, they want to see rigour and convincing arguments in the choices being made in the management of the assets.

All makes total sense – we’re dealing with members’ future financial security here in many cases after all – however contrast this with (say) a “driver” in the chairman’s seat: someone brought in to get things moving, passionate about making progress, changing things for the better, making members better off. It becomes easy to see how these differing styles might cause tension.

Let’s add in the corporate sponsor angle – perhaps a pioneer in the CFO or CEO seat. A natural risk taker who doesn’t like to hear the word “no”, drawn to bold and innovative approaches and focused on the big picture. Sound familiar?

Where are the advisors in all of this? 

The key advisors to the scheme (actuary, investment consultant, covenant advisor, lawyer) will also contribute to the team dynamic, perhaps significantly so, and might have a variety of styles – and this is one area actually where the model opens up some choice. The trustees can choose their advisors after all and if they are aware of the mix they naturally have around the table, then they might want to select their advisor to complement that. Perhaps an integrator to try and bring people together, or a driver to generate momentum alongside the chair. Perhaps it might even help to have different personalities in the advisors – a guardian to represent and appeal to the guardian types around the table alongside a driver.

Without wanting to generalise excessively, it’s my experience that actuarial-types are likely to often display guardian characteristics to some degree (having said that I do know plenty of pioneer and driver actuaries). In some ways this isn’t surprising: careful study, discipline and logic are what gets you through the exams (and probably attracts many people to the profession). Having guardians among your advisers may be good, but might not be the best choice if the trustee board is already guardian-heavy.

The picture is further complicated in those pension funds that might have significant internal teams involved in the management. Perhaps a bold portfolio manager with pioneering anti-consensus views. There might be an integrator in there, or more guardians.

So what?

So the model’s great, but what can we do with it? What actions can we take away in order to help our pensions teams work better together, harnessing the benefits of cognitive diversity rather than experiencing the tensions.

Well, firstly simply having a common language to understand the differing styles within teams I personally find hugely helpful. Being able to depersonalise by saying things like “look, the guardian in me is saying X”, or “the driver in the room would be saying Y” allows teams to lightheartedly explore the differences without things becoming personal or existential, and hopefully without battle lines being drawn.

But there is more than that.

Adjust your style

Once you are aware that you’re a guardian type, craving rigour and logic, working alongside a driver who is committed to progress and getting things done it becomes easier to recognise and adjust your style – perhaps that means going outside your comfort zone to try and get to a decision on a key issue with incomplete data,  being happy working with a bit of ambiguity in an area that can’t be pinned down, or being open to new types of solution that don’t necessarily fit into existing modes of thinking. On the flip side the driver might need to be patient in systematically exploring the data behind the decision to appease the guardians, stepping through details like by line when their instinct is to get it done and move on.

Recognise minority styles 

Making sure that minority groups are represented and have a voice is really important to be productive and is something that can be influenced – for example it’s possible to verbally acknowledge that a group is guardian-heavy and that they need to try and listen to – and be receptive to the perspective of –  the drivers. Rather than playing “devil’s advocate” in challenging ideas, it may be more helpful to “play driver” or guardian. Especially if that isn’t your natural style.

Add to the team carefully 

When there’s the opportunity or need to add to the team, the model gives a clear roadmap for exploring the fit between the needs of the team in terms of personality and potential candidates. In particular it highlights the need to bring integrators to the table, and potentially the need to bring more balance to the driver/guardian split.

Get close to your opposites 

It’ll often be in one-on-one relationships where the real differences emerge and pain-points become apparent. Knowing how those styles opposite to you will react, what energises them, and how they prefer to work will be really helpful. It might involve getting out of your own comfort zone and adapting your style (as mentioned above), but it must just increase the chance of progress being made.
Beware of cascades

Teams with lopsided composition can be vulnerable to decision making biases such as cascades – where the views of those first to speak become echoed by others and grow into a crescendo until they go unchallenged. The key to addressing this is to consciously “elevate” the minority styles on the team – perhaps making sure they are first to speak when it comes to decision making.

These are just some quick thoughts on how this powerful model could apply to pensions. Do tweet me with your thoughts.

2016’s Most Popular 

My most-read blog posts of 2016 were: 

1. Why Anthony Hilton is wrong about DB pensions 

This post, responding to the misguided (in my view) viewpoints of London Evening Standard journalist Anthony Hilton in September garnered by far the most views of any of my blogs this year (around 1400 views). 

An extended version of this article was also featured in Professional Pensions, and also became their most viewed opinion piece of the year

The article must have stuck a chord with readers in the pensions world. We do of course live in pretty challenging times for DB pension funds, with several strong macro-economic headwinds making it harder to deliver the benefits that have been promised. This year saw a vigorous debate around what should, or should not be done to the DB pensions system. This debate was further catalysed by the high-profile cases of BHS and British steel, and the debate looks set to run on into 2017. 

Given the importance of the DB system to the retirement prospects of millions of members I believe a solid debate on some of these important issues is to be welcomed, and look forward to continuing the debate productively in 2017.

2. No Ordinary Collision – the Future of Asset Management

Powerful forces of change are at play in many industries, and asset management is certainly one of them. Technological and demographic shifts will shape the future of the asset management industry, in this piece (April 2016) I discussed some of  the intersecting forces, drawing on a wide body of existing research on the future of work and finance. 

Here are my six key takeaways: 



3. Consulting firms reply to the Work & Pensions Select committee 

In the wake of the BHS pensions story, the W&PSC issued a green paper calling for views on the future of the DB pensions system in the U.K. Given the prominence of this debate and the considerable air-time it’s received this year the responses from the main actuarial & investment consulting firms were considered and insightful. What was also interesting was the diversity of views. Will most schemes pay the benefits promised? Should the role of TPR change? Should there by wholesale change to the system? Will small changes be effective? Is consolidation feasible? These were all questions on which the consulting firms gave insightful, but often differing answers. 
I hope you’ve enjoyed my blog posts this year. I look forward to sharing more in 2017. Sign up to receive updates on new posts.

Why Anthony Hilton is Wrong on Pensions 

“Expected returns don’t pay benefits, cash does”

Anthony Hilton recently wrote a stinging attack on pension consultants -like myself- who advise defined benefit pension schemes to measure, and hedge, their liabilities with reference to gilt yields.

Here’s one (of several) reasons why he’s wrong.

His argument – that you could fund based on the much higher expected returns on risky investments – might perhaps be justifiable in a world where all corporate sponsors were rock solid and would last forever (clearly we do not live in this world – and even then it would expose companies to some needless nasty surprises along the way, but anyway).

However this completely misses the point that a major reason we fund pensions at all is precisely to provide security in a situation where the corporate sponsor ceases to be able to make payments itself. The reason we need to measure deficits is to get a picture of how secure the benefits might be in the absence of the employer, and to take corrective action (eg topping up contributions) if the situation is off-track, before it is too late.

And in those situations of sponsor company failure, we would hit a major snag under Mr Hilton’s approach: it’s hard cash that must be used to secure the benefits – Mr Hilton’s expected returns won’t cut it I’m afraid. Just ask the pensioners of BHS scheme, or indeed the allied steel and wire groups, still campaigning for their pensions over a decade later. This second example pre-dates the Pension Protection fund, so thankfully pensions today are better protected, but the conclusion for scheme funding – that you can’t rely on high future expected returns to discount liabilities – remains valid.

Pensions need to be paid to members in real cash, and it flies in the face of both accepted theory, and common sense, that the amount of money needed to provide these benefits can be reduced depending on the assets held to deliver them.

Today’s unfortunate reality is that the defined benefit system in the UK is on average chronically under funded compared to the benefits it has promised. Time and effort would be far better spent on considering the tough choices that might need to be taken, rather than on attempts to deny the existence of a problem in the first place.

Unfortunately Mr Hilton’s ill-judged remarks from an otherwise respected journalist damage the hard work that many of us in the industry have been doing for many years to try and secure the benefits and financial futures of those members dependent on defined benefit pensions for their retirement.

Grim Summer for DB Pensions

It’s not been a good summer for the financial health of UK DB pension funds.

Data released by the PPF in September underlined a summer of bad news for schemes and scheme sponsors.

A continued trend of falling gilt yields have seen liability values increase dramatically – adding more than £200bn to the aggregate deficit compared to the start of the year. The aggregate funding level (on the PPF basis) fell to 76% at the end of August, the lowest value in the 10-year history of the series. For context the funding level on this basis was close to 100% at the end of 2013.

Long-dated gilt yields have fallen from around 2.5% at the start of the year to around 1.2% by the end of August.

The result of the referendum vote certainly added impetus to the move lower in gilt yields, as “lower for longer” became a more likely scenario, and this was re-enforced by the BoE’s announcement of renewed bond purchases (quantitative easing) and a cut in interest rates to 0.25%.

While asset markets have generally performed positively – especially overseas equities in £ terms, these good results have been insufficient to keep pace with unhedged liabilities.

It seems likely that actuarial valuations as at 30 June or 30 September are likely to contain bad news for corporate sponsors, prompting tough conversations such as those happening at plastics manufacturer Carclo, and negative headlines such as those at Associated British Foods. These are likely to become more and more common as we move forward, as highlighted by LCP in their Accounting for Pensions report.

august-2016-a-decade-of-db-pensions

 

Two Days Among Actuaries

Just back from a couple of great  (sunny!) days in Edinburgh for the institute of actuaries conference which importantly this year incorporated pensions, investment and risk components together for the first time.

Quite a lot of interesting takeaways and observations from around the industry. As Marian Elliott said in the first session  “To the worm that lives in horseradish, the whole world is horseradish”. The point being it can be helpful to get a different perspective on things from the one you usually have.

Here are the big 3 things I took away:

 1. Integrated Risk Management (IRM). The pensions regulator continues to stress the importance of IRM in the latest funding statement here, and the IFoA working group has made progress thinking about the issues.

My  takeaway was that this remains a work in progress in that no-one has (yet) put forward the “perfect” framework for looking at these three components and bringing them together in an intuitive and practical way  (possibly, that doesn’t exist). What the working party has done is given considerable thought to a number of worked examples that act as  “corner cases” and challenge people to  think qualitatively about those different components of risk, what investment and funding strategies should result and  key metrics to track to best monitor.

With some of the current high profile cases in the news, the examples seemed very pertinent.  It’s clear that thinking in some of these cases has to come back to the member perspective, and what gets the best outcome for members benefits, and this inevitably includes thinking about the possible interaction with the PPF, something that clearly has to be handled carefully.

While this remains a work in progress I think the thinking that went into the worked examples, including legal opinion on certain points, is a welcome contribution to this important area. The suggested further reading (including  the Blake / Harrison paper  The Greatest Good for the Greatest Number looks interesting and I look for ward to reading further)

The session ended with a challenge to the audience – someone needs to take the initiative and bring these strands together. The working party proposed that actuaries are well placed, I would argue that the investment consultant is, too. The WP expect to communicate more toward the end of the year, I look forward to continuing the conversation.

2. British Steel

Not surprisingly this seemed to be one of the major talking points of the conference over many a coffee and beer. It’s putting the issue of pensions on the front pages of mainstream papers and into the general public discourse in a way that I haven’t really seen during the rest of my career (possibly you need to go back to the 1990’s and Maxwell to find a similar time). The panel discussion organised to address the consultation and the profession’s possible response was remarkable both for the number of people filling the room, and the strength of views expressed. This session was explicitly under “Chatham house rules” so I won’t share too many details, but fair to say there was a lot of questioning of the need to make this scheme a special case, and the danger of making up legislation and precedent “on the hoof”. A couple of interesting prior cases were mentioned including British Midland/Lufthansa which I need to read up on.

The discussion of the individual consultation options was interesting, albeit somewhat drowned out by the wider question of whether creating a special case is the right thing. What was clear is that there is an increasing acknowledgement that the ability (or not) of any scheme to move benefits from RPI to CPI may essentially be an accident of drafting and in effect is a lottery. I strongly suspect that whatever happens to British Steel we haven’t heard the last of the CPI/RPI debate which looks set to continue rumbling on.

3. Endgame & Self sufficiency management

Paul Sweeting of LGIM wrote a recent paper on a blueprint for self sufficiency management, and this got quite a few mentions. It’s a welcome contribution to the area and ties in with a lot of our thinking. The use of contractual cashflow, and alternative metrics for risk, with a nod to the practice and mindsets of the insurance industry makes a lot of sense.

the key findings of the paper are:

  • Focusing on the probability of paying all benefits is a helpful metric for end game schemes (more so than VaR or volatility);
  • For schemes that are well funded enough, corporate bonds are the best asset to hold to maximise this metric;
  • Allowing for defaults, downgrades and being dynamic with decision to reflect changes in spread level is important;
  • Conventional mark-to-market volatility becomes less of a consideration;
  • Where liability present values are needed, the corporate bond spread  can be embedded into the discount rate, to create matching of assets and liabilities.

While probably not that many schemes are in the end game yet, as we noted in this blog it is important to set out with this destination in mind, even if it is some way off. And as we know from survey data many schemes have self-sufficiency in mind as a goal. A useful first step is to make sure they have advisors and fund managers in place with a clear and sensible plan to construct and implement a strategy to deliver the scheme’s self-sufficiency goal.

Ri_End_Game_Infographic