Technology changes will demand new levels of adaptability and forward-thinking, the CFA Institute has said, particularly if these technologies address the unique challenges pension funds face in generating sustainable income for future generations.

A report from the CFA Institute Research and Policy Center suggested that demographic shifts, underfunding of defined benefit (DB) pension plans, inflation, rising inequalities, and gaps in financial literacy, have created an “increasingly complex” pensions environment and more risk of pension inadequacy for retirees.

The report explored how artificial intelligence (AI) and machine-learning (ML) technology could address critical issues facing the global pensions industry.

In addition to this, the report said AI had the potential to enhance personalisation, efficiency, and accuracy in pensions by addressing key challenges and providing tailored solutions to the unique needs of funds.

While AI has a diverse range of potential applications, the report emphasised the importance of exploring how it can be effectively utilised to improve retirement security for pension members.

It also said that the implementation of AI in member onboarding, communications, reporting, and retirement planning, could boost member engagement and financial literacy.

Furthermore, the report said that AI would likely impact pension plan governance, including assisting multi-stakeholder interactions and easing information sharing, including reductions in administrative burden through report summaries, error identification, and prompt responses built on generative AI technology.

The CFA Institute argued that increased efficiencies in information sharing, and analysis could improve pension boards’ decision-making, including investment strategy decisions, and produce timely resolutions to member issues.

The report also suggested improvements to the analytical capacities of internal and external portfolio managers, through AI and ML models.

This could enhance actuarial analyses of pension fund risks as well as maintain updated assessments of current and future market trends, according to the report.

It also acknowledged that AI could be particularly useful in analysing private markets and data related to sustainable investments.

In addition to this, it suggested that defined contribution (DC) plans could benefit from having ML analyses that incorporate predictions of member behaviour, as it could produce accumulation and decumulation strategies tailored to member characteristics.

For smaller pension funds, the CFA Institute said using external service providers could be an effective way to incorporate AI technologies into the value chain without the appropriate resources to scale technology in-house.

The institute also urged pension trustees and administrators to perform due diligence when considering technology providers to ensure compliance with privacy and data regulations.

In addition to this, it said trustees should ensure technology goals and strategies are appropriately aligned with the aims, values, and long-term time horizon of the pension fund.

Commenting on the report, CFA head of advocacy for Europe, Middle East and Africa, Olivier Fines, emphasised that "AI can add more than just operational efficiencies".

He noted that from onboarding new members to account management, plan governance, investment management, and decumulation strategies, AI and ML could play a “positive role in addressing key issues facing the pensions industry”.

However, Fines said transparency and “robust” governance in the use of technology would be “vital” to building trust and rapport with pension plan members.

“As investment firms and plan sponsors increasingly integrate the technology in their processes, collaboration with technology providers and regulators will be important to ensure that workflows consider the specifics of individual pension plans and respect their operating models, fiduciary duty, and the regulatory framework they operate in,” Fines added.

“This is why we believe AI should support, not replace, human decision-making and why it will be critical to set clear objectives and benchmarks for evaluating model effectiveness.

“We believe AI should play a major role in balancing personalisation and simplicity, accounting for individual needs and varying levels of financial literacy.

“This should foster increased member engagement and promote financial wellness.

"AI can also assist trustees and advisors in navigating the crucial decumulation phase for plan members.”

---