July 21, 2024
Mercer CFA Institute Report Reveals AI's Impact on Pension Funds
AI

AI’s Transformational Impact on Pension Funds: Mercer CFA Institute Report Unveils Potential

Pension funds, as per the Mercer CFA Institute global pension report, can harness the power of artificial intelligence (AI) to reduce costs, boost investment returns, and identify potential risks. The report, jointly released by the consulting firm and the investment professional association on October 17, underscores the valuable role of AI in assisting pension fund managers in sifting through vast datasets to uncover investment opportunities and construct tailored investment portfolios.

The report’s lead author and Mercer senior partner, David Knox, emphasized that AI holds the promise of significantly enhancing both the member experience and retirement outcomes within pension systems worldwide. AI tools employing natural language processing can also be employed by pension funds to scrutinize their members’ communication channels, such as emails and calls, enabling the customization of marketing and outreach strategies based on individual communication preferences.

AI-powered analysis is positioned to recognize patterns, gauge market sentiment, and detect signals that point toward unconventional future investment possibilities. This, in turn, can lead to improved asset allocation and diversification, translating into enhanced long-term returns and decreased volatility. Furthermore, AI has the potential to facilitate the assessment of environmental, social, and governance (ESG) factors and the automation of middle and back-office functions, reducing costs and bridging the gap between passive and active investment strategies.

AI’s predictive capabilities extend to anticipating member behavior in response to various economic and political scenarios that may influence pension fund cash flows. For instance, a stock market crash could prompt members to shift to more defensive asset classes, while the election of a new government might lead some retirees to withdraw their accrued benefits.

The report also underscores the imperative need for robust defenses against cyberattacks, scams, and other security breaches. It is noted that AI is already playing a role in investment markets, making decisions based on data analysis, reports, risks, and market trends. The advent of programmable trading has been in practice since the 1980s, with high-frequency trading reshaping investment management methodologies. Algorithmic trading, as reported, has become a substantial component of automated trading, contributing to as much as 73% of U.S. equity trading in 2018.

Nonetheless, it is important to acknowledge that AI tools can generate deceptive or erroneous information, and uncertainties surrounding their use are expected to persist as they are unlikely to consistently predict market prices accurately.

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