Just before Christmas a colleague and I hired a car to travel to a client education session. However, the journey actually turned out to be an education for us.
As with most hire cars, this one was new and consequently had all the latest gadgets. One of those gadgets was “Adaptive Cruise Control”. We were intrigued and decided to try it out. Effectively it is a cruise control where you set the speed as per normal but, in addition to maintaining this speed, the car slows down and speeds up depending on traffic. So if we set it to 70mph and a car pulled into our lane the car would slow us down. When that car moved away to a safe distance our car would accelerate back to the pre-set speed.
So the questions for us in the car were: (i) why is it worth trying this new gadget and (ii) how do we learn to trust it?
For us – as we had both used cruise control before – the idea of a cruise control that stopped you crashing and sped you up when it was okay to do so was an easy concept to tempt us in. The more worrying experience was how to trust it.
We achieved this trust in two ways. Firstly, before we turned it on, we had a think about how it must work and how we would expect it to behave. However, the only way to trust something new is to try it. So we turned it on and assessed how it was doing relative to our prior assumptions.
What we found was that the first 15 minutes using this system was far more stressful than driving the car normally, with the driver’s foot constantly hovering over the brake pedal and both driver and passenger on edge – we wanted to test it, yes, but we didn’t trust it.
However, after that first 15 minutes had passed and we were able to see and understand exactly how the system behaved, the drive was significantly more relaxing than driving in stop-start traffic normally.
This got us thinking – is our experience actually a condensed version of what trustees feel when faced with things like LDI and structured equity?
What we see (as did, no doubt, the engineers of our hire car when designing it) are powerful tools that, when trustees have them, enable them to worry less – whether that is from interest rates or equity markets.
What trustees must see is (a) something new, and (b) something they don’t understand or trust. So the obvious questions Trustees have are (a) why is it worth trying something new and (b) how do they get comfortable using it?
What we as an industry must get better at is helping trustees address these questions.
Understanding the benefit of protection from equity market falls is easy. But I do not think the same is true of interest rates. After more than 10 years of LDI there are still significantly more schemes without than LDI than those with. The industry needs to make new things feel less scary so that trustees are interested in exploring things further.
Once this is achieved how do we help trustees explore and test new things?
I don’t think it is all about explaining how things work. In our hire car we had no idea what technology was used, let alone how it worked. For us, it is about helping trustees understand the behaviours that demonstrate to them that something is working and the behaviours that indicate that it is not, implying that they (or their consultant) need to step back into the driving seat.
Perhaps, also, it is about a phased shift into something new – trying a little bit first to test the theory and gradually building up as the trustees see it working.
Ultimately it boils down to taking some time to get it right. Hoping a trustee will put something in place after a single meeting on the basis of how clever it is would be a road to disaster.