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I founded and co-founded a couple of companies: Redington and mallowstreet; now I have launched a global initiative, Partnership for Change, which is working to improve healthcare, long term care, pensions & savings and technology for a rapidly ageing population. I write about issues of the day that touch me and make me think. Mostly about how to make things better.

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Underfunded pension funds and the lesson of Flight 447

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On June 1, 2009, Air France Flight 447 crashed into the mid-Atlantic during what should have been a routine night flight from Rio de Janeiro to Paris. All 228 passengers and crew perished. The cause of the crash was, on the face of it, a complete mystery. The Airbus A330-200 was a highly sophisticated aircraft and was being flown by three well-qualified pilots. The captain alone had 11,000 hours of flying experience.

In theory, such a crash should have been nigh-on impossible. But it happened. The results of the crash inquiry have finally been published. It turns out the junior pilot made a major error which he persisted with. The other two, more senior, pilots failed to appreciate what he was doing until it was too late to rectify. They simply ran out of time.

If you are involved in running a pension plan, there are some highly relevant lessons from the tragedy of Flight 447.

Here’s what happened on that fateful night:

“I’m in TOGA”

High over the Atlantic, between Brazil and West Africa, the plane’s pitot tubes froze. These are the small, forward facing, ducts that measure airspeed. In itself, that should have been no big deal; however, it caused the plane’s autopilot to disengage – the plane was now in the hands of Pierre-Cedric Bonin, the most junior of the three Air France pilots. At the same time, the plane hit turbulence and Bonin made his mistake. For reasons which are not clear, he reacted by pulling the nose of the plane up. The aircraft began to slow dangerously, and multiple alarms sounded loudly in the cockpit: Stall! Stall! Stall!

At this point, Bonin should have lowered the nose, picked up speed, and all would have been fine. But he was disorientated, saying to himself:

I’m in TOGA, huh?”

TOGA stands for “Takeoff & Go Around” which is what a pilot does when aborting a landing approach. At 38,000 feet, Bonin was a very long way from being in TOGA. However, he gunned the plane’s engines to full power, keeping the nose tilted upwards, in an “angle of attack” of 15 degrees – exactly as though he was aborting a landing a few metres off the ground.

At this altitude, and in super-thin air, it was about the worst thing he could have done. The plane began to climb and then, with the nose pointing up at an incredible 40 degrees, and slowing to just 60 knots, Flight 447 began to stall.
Now, although the plane’s nose was sharply up, the plane was simultaneously descending fast. The Airbus’s electronic navigation screens suddenly went blank, struggling to interpret this apparently contradictory data.

With David Robert (his co-pilot) and Dubois (his captain) shouting at him to lower the nose, Bonin did so. It was the first time in three minutes that Bonin had done the right thing . But as the plane’s electronics kicked back in, the Stall! alarm sounded again. Bonin, who by this time had no idea what the plane was doing, resumed the climb. It proved fatal. Seconds later the plane reached its propulsion ceiling, stalled and fell out of the equatorial night sky.

As the plane plummets, Captain Dubois yells: Climb!, Climb!

Bonin then whispers:  “But I’ve had the stick back the whole time…”

In a terrible moment of clarity, David Robert and Captain Dubois finally work out what has gone wrong:

  1. Bonin had made a catastrophic error of judgement. He had been climbing “the whole time” – holding the control stick back in the nose-up position and, eventually, stalling the aircraft.
  2. Robert did not know what Bonin was doing (the control stick is situated out of the co-pilot’s line of sight on the A330-200).
  3. Dubois had failed to supervise them – he was out of the cockpit having a break.
  4. In the final four minutes of the flight, none of three pilots calmly scrutinised the navigation instruments in order to establish what was happening to the aircraft under their command.

By the time the crew had figured things out, it was too late.
As the report says on page 182 (Para 2.1.3.5):

The crew had almost completely lost control of the situation.”

According to the report, two key factors contributed to the crash. First, Bonin assumed, wrongly, that it was impossible for the plane to stall. Second, he believed, also wrongly, that he was doing the right thing by keeping the plane in the nose-up position. It was a disastrous combination of wrong beliefs.

The aircraft remained stalled during its entire 3 minute 30 second descent from 38,000 feet before it hit the ocean surface at a vertical speed of 150 km/h (90 mph).

Salutary lessons for anyone involved in running a pension plan

Trustees are engaged to sit on the pension plan’s flight deck and to take it from the underfunded favelas of Rio, to the plentiful abundance of Paris, where every member gets paid her benefits in full and on time.

It should be a routine journey, but, increasingly, it is apparent that some pension plan trustees are struggling to fly the pension A330-200 Airbus. The air is ultra thin, there is plenty of rough turbulence, and blaring klaxons are going off left, right and centre.

At times like these, there are key moments when the correct decision has to taken – first time. There are no second chances. If the pension plan’s crew reacts incorrectly to incoming data, there is very little opportunity to work out what has gone wrong. As the stress mounts on the trustees, the situation becomes more and more difficult to correct.

For instance…

I recently came across a small pension plan which, for historic reasons, has no corporate sponsor.  Along with every other defined benefit pension plan, the trustees have had ample opportunity to hedge (insure) against a falling real yield (and rapidly rising liabilities) but, up on the flight deck, someone decided not to pursue that route. A Bonin (by another name) chose to keep doing the same thing (relying on the equity risk premium and failing to hedge) until the plane stalled.

Here’s an extract from their latest Funding Statement:

“In accordance with statutory requirements, the Trustee has now received an actuarial report which provides an approximate update of the funding position of the Scheme as at 1 January 2012. Unfortunately, this shows that the funding level of the Scheme deteriorated markedly during 2011 from 63% to 48%, with the shortfall increasing from £3.6 million to around £6.3 million.

It is not a big scheme, but to the good folk who are reliant upon it, it’s all they have.

The accompanying explanation from the pension plan’s flight crew is woefully inadequate:

“This problem is not specific to the Scheme, as these conditions have had a very serious effect on almost all defined benefit schemes in the UK. Current financial market conditions are very unusual by historical standards and a return to more ‘normal’ conditions is expected to be beneficial for scheme funding, but we do not know if or when that may happen.”

Those last few words are the equivalent of Pierre-Cedric Bonin’s and David Robert’s abject admission to Captain Dubois in the final moments of Flight 447:

We have lost control of the plane.

No doubt, Bonin-like, the trustees believed it was simply impossible for the real yield to fall to zero percent. And, for sure, during the last five years, the trustees also believed they were doing “the right thing”.

On both counts they were wrong and the pension plane has stalled. It should not have happened. But, with a funding level of 48%, it undoubtedly has.

It is a sobering thought, but there are many other pension plans which, but for massive contributions from their corporate sponsors, would be in the same position.

And whilst there are plenty of sophisticated navigation tools available to make sense of these difficult flying conditions and frozen pitot tubes, many pension plans simply do not use them.

Flying the Plane

If you are a trustee sitting up on the flight-deck with your hand on the control stick, here is a set of questions designed to help you figure out whether you are cut out to fly the plane to Paris. If you are, that’s great. If you are not, you may want to think about getting yourself up to speed.

I hope you find it useful:

https://www.surveymonkey.com/s/Are_you_a_BlackBelt_Pension_Plan_Trustee

 

 
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2 comment on “Underfunded pension funds and the lesson of Flight 447

  • Anonymous
    July 29, 2012 | 5:48 pm

    As a Airbus pilot & DC pension trustee, I found this story interesting.
    In both examples, training, experience and judgement are critical.
    Both examples require 'team work'.
    Pension scheme trustees are reliant on their advisors.
    Are the advisors good enough?
    Richard Minashi ( AMNT)

  • Dawid1
    July 30, 2012 | 10:12 pm

    Richard, yes, you highlight a key difference between pilots in control of an aircraft and pension plan trustees – i.e. that the trustees are generally heavily reliant on their advisors. Perhaps the time has come to have a discussion on the criteria against which to judge whether advisors are up to the task.

    Any views welcome!

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