AI's Potential in Pension Funds: Opportunities and Challenges Ahead
Summary:
The Mercer CFA Institute global pension report suggests that while AI presents potential benefits for pension funds, including reducing costs, optimizing investment returns, and managing risks, it also poses challenges. Despite the hurdles, AI could help fund managers sift through extensive data, spot investment opportunities, and customize investment portfolios. AI-assisted analyses could lead to improved asset allocation, better diversification strategy, and prospects for non-traditional investments. It also holds the potential to predict pension fund members' responses to a variety of economic and political circumstances. However, the report warned against misleading information that AI tools can generate and underscored the need for strong cybersecurity measures.
Pension funds have the potential to leverage artificial intelligence (AI) to navigate investment risks, increase gains, and streamline costs, though substantial hurdles still need to be navigated, according to the recently released global pension report by Mercer CFA Institute. Proliferated on October 17th, this report paired the consultancy with an investment professional body and recognized AI's ability to aid pension fund supervisors to filter vast data sets, target rewarding opportunities, and design tailored investment portfolios.
David Knox, the report's leading writer and a senior partner at Mercer, commented that the influence of AI on global pension systems stands to notably enhance the benefits and experience of the members. AI tools with natural language processing capabilities could potentially be utilized by pension funds to scrutinize member habits, thus personalizing promotional and outreach endeavors by assessing data extracted from calls and emails.
It is suggested that AI-assisted evaluations will discern patterns, determine market sentiment, and predict non-traditional, prospective investment prospects. This could potentially lead to superior long-term yields, reduced volatility, and enhancements in asset allocation or diversification strategy. Moreover, AI's integrative role in strategizing around environmental, social, and governance (ESG) aspects and the anticipated automation of middle and back-end offices would potentially contour cost reduction aligning active and passive trading strategies.
AI projections around behavioral responses of fund members to diverse socio-political and economic factors is anticipated to stabilize the cash flow associated with pension funds. Illustratively, plummeting stock markets could prompt members to resort to conservative asset classes, while a revamped government might lead some retirees to cash in on their accrued benefits.
However, the report iterates potential drawbacks with AI's effectiveness affected by potential dissemination of fraudulent or imprecise information and the likelihood of AI's failure to predict market prices accurately. The report echoes the need for robust safeguards against digital threats, fraudsters, and other potential security violations.
AI is already a critical influencer of investment market decisions, deriving insights from data, market trends, risks, and reports and altering traditional trading tenets. The evolution of this technology-driven market from algorithmic trading since the 80s to high-frequency trading now has revolutionized investment management practices. A significant proportion of automated trading is attributed to algorithmic trading, occupying up to 73% of equity trading in the US in 2018 alone.
Published At
10/17/2023 7:37:23 AM
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