Melvine’s AI Analysis: #16 - Pensions in the Age of Artificial Intelligence: A Transformative Opportunity
Melvine Manchau
Senior Strategy & Technology Executive | AI & Digital Transformation Leader | Former Salesforce Director | Driving Growth & Innovation in Financial Services | C-Suite Advisor | Product & Program Leadership
February 27, 2025
The global pension landscape, managing trillions in assets, faces mounting challenges. Demographic shifts like aging populations and declining birth rates, coupled with economic pressures such as inflation and rising inequality, threaten the long-term viability of retirement systems worldwide. Simultaneously, the rise of artificial intelligence (AI) presents a transformative opportunity to address these challenges and reshape the future of pensions.
This article, based on the CFA Institute report "Pensions in the Age of Artificial Intelligence," explores the potential of AI to revolutionize the pension value chain, enhancing efficiency, personalization, and ultimately, retirement security.
Key Challenges Facing Pension Systems:
Changing Demographics: Increasing life expectancies and declining fertility rates strain pension resources and create funding gaps.
Underfunding: Both defined benefit (DB) and defined contribution (DC) plans face underfunding risks, impacting plan sponsors and individual members.
Inflation erodes the purchasing power of retirement savings, necessitating careful management and inflation-protected strategies.
Rising Inequality Exacerbates retirement insecurity, particularly for vulnerable populations with limited access to retirement plans.
Financial Literacy and Information Gaps: Complex pension systems require informed decision-making, yet many members lack the necessary knowledge and resources.
Demand for Personalization and Financial Wellness: Individuals increasingly seek personalized retirement solutions and support to achieve financial well-being.
AI's Transformative Potential Across the Pension Value Chain:
The report identifies several key areas where AI can be implemented to address these challenges:
Membership and Payment Channels: AI-powered chatbots can streamline onboarding, provide personalized support, and enhance member engagement. Automated payment systems can improve efficiency and reduce administrative burdens.
Recordkeeping and Account Management: AI can automate reporting and disclosure processes, enhance fraud detection, and provide personalized insights to members.
Governance and Investment Strategy: AI tools can support trustee decision-making by summarizing complex reports, identifying errors, and facilitating information sharing. AI can also enhance investment strategy development, manager selection, and stewardship activities.
Investment Management: AI and machine learning (ML) models can improve portfolio management, analyze private market data, and integrate sustainable investing principles. Robo-advisors can offer personalized investment advice and portfolio management to DC plan members.
Payout Phase: AI can enhance risk management for DB plans and provide personalized decumulation strategies for DC plans, considering individual member characteristics and risk profiles.
Key Principles for Pension Plans Using AI:
The report emphasizes the importance of responsible AI implementation, guided by the following principles:
Balance Personalization with Simplicity: Provide clear and accessible information alongside personalized insights to cater to varying levels of financial literacy.
Foster Collaboration: Develop industry-wide standards and best practices for AI implementation in collaboration with firms, regulators, and other stakeholders.
Build Trust and Transparency: Use AI to enhance, not replace, human decision-making. Clearly communicate to members the benefits and limitations of AI-driven solutions.
Focus on Member Outcomes: Set clear objectives and benchmarks to evaluate the effectiveness of AI applications and ensure they contribute to improved member experiences and retirement outcomes.
Conclusion:
AI offers a powerful toolkit to address the complex challenges facing pension systems worldwide. By strategically implementing AI across the value chain, pension funds can enhance efficiency, personalize the member experience, and ultimately, improve retirement security for current and future generations. However, responsible implementation, guided by ethical considerations and a focus on member outcomes, is crucial to realizing the full potential of AI in the pension industry.
By Melvine Manchau, Digital & Business Strategy at Broadwalk and Tamarly
https://melvinmanchau.medium.com/
