Exploring the Future of Pensions: Could Cryptocurrencies and AI Be the Game Changers?
Summary:
This article discusses the challenges pension funds face globally, given the aging demographics and diminishing trust in social security models. It explores the idea of pension funds considering cryptocurrencies and AI as potential investment avenues. It includes details about the Ontario Teachers' Pension Plan's losses in the cryptocurrency sector and discusses the potentials and pitfalls of incorporating AI into investment strategies, giving examples like the AI-driven fund AIEQ. The future of AI and pension funds is examined, considering the changing societal dynamics and the possible impact of AI on labor productivity. The article concludes that the future role of AI remains uncertain but potentially significant.
Pension schemes globally confront persistent trouble, exacerbated by declining birth rates and a diminishing trust among the youth in long-term social security models. To endure these issues, many of these funds are adapting by exploring novel investment opportunities such as cryptocurrencies. A 2022 study by the CFA Institute revealed that an impressive 94% of state and government pension funds had stakes in at least one form of cryptocurrency. However, this newfound interest in the fluctuating digital currency market hasn't been without its drawbacks. For instance, the Ontario Teachers' Pension Plan (OTPP) incurred a $95 million loss in 2023 on its FTX investment, which led to its reluctant retreat from the sector. The OTPP's markdown may have put off other pension funds from embracing cryptocurrencies or other cutting-edge assets and tech for their investment strategies.
Cryptocurrencies might be versatile for mainstream investors, but often they are reduced to mere speculative assets. In contrast, the rising star, AI, potentially promises broader applications. Given the increasing impossibility to ignore or bypass AI, it is worth pondering: Is it safe to include AI in pension funds portfolios?
As the Mercer CFA Institute Global Pension Index 2023 unveils, a significant portion of countries' pension systems carry substantial risks or weaknesses that must be rectified; the US is part of this alarming group. Others, like Argentina, face imminent collapse without necessary improvements. Aging demographics pose another issue. Developed countries, including Japan, the US, and many European nations such as Italy, are seeing an alarming decline in their birthing ratio, leading to the looming demographic crisis that requires innovative solutions to ensure the continuity of pension funds. One such innovation could be AI.
AI could potentially assist in decision-making related to investments, adopting a role similar to programmable trading since the 80s, the increasingly employed algorithmic trading in today's trading methods, and the future's high-frequency trading. AI has the potential to make pension funds more cost-effective by analyzing clients' behavior patterns, evaluating environmental, social, and governance (ESG) stock reliability, bridging passive and active investment strategies, and detecting market patterns to predict unconventional future investments.
Considering the mixed results from AI-driven funds like AIEQ, pension funds may still have doubts about fully implementing AI in their investment approach. A common pitfall could be overinvesting in tech stocks based on the machine learning's inputs, which leaves a question mark on AI investing's efficiency.
Generative AI (like ChatGPT), however, appears promising even with its learning curve. The prospect of boosting labor productivity significantly appeals to major investors like Google. Yet, understanding how AI makes its decisions might require patience and a learning curve. Generative AI, according to Juan Calvo at AI consultancy firm Datatonic, could be used as a daily tool rather than a standalone entity.
The Japanese Government Pension Investment Fund's study on AI application backs this idea. It highlights AI's prospects in asset management, leading to a race for the first-mover advantage and possibly degenerates to index investing eventually.
As AI's use cases are hard to predict, it's likely that younger segments may not invest much into a still undeveloped field. This might explain why AI in pensions hasn't received much attention. But as Felix Mantz from Cardano points out, the future of AI and possible universal income could potentially eliminate the pension challenge altogether, though it could possibly worsen the natality problem. AI, in any case, remains a dormant but ticking time bomb, bound to impact future investments and retirement planning.
Published At
12/5/2023 5:01:00 PM
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