Is AI a safe bet for retirement investment?

Pension funds are in a perpetual crisis worldwide, with low demographic rates in many countries foreshadowing a dim future for such investments, combined with young people’s lack of faith in the continued existence of social security models.

In order to stay afloat, many pension funds have strived to remain apprised of new investment opportunities, including cryptocurrencies. According to a 2022 study published by the CFA Institute, “94% of state and government-sponsored pension funds are invested in one or more cryptocurrencies.”

But pension fund interest in volatile cryptocurrencies has not come without consequences.

In April 2023, Ontario Teachers’ Pension Plan (OTPP) backed off from investing in the cryptocurrency sector after losing $95 million on its stake in FTX. The failure of OTPP may have discouraged other pension plans from getting close to crypto or other emerging assets and technologies for their investment plans.

Artificial intelligence (AI) and digital assets share a similar hype.

For better or for worse, this relationship could affect them. Cryptocurrencies offer a wide versatility, although mainstream investors may categorize them as vulgar speculative assets. AI, the new kid on the block, could offer many more use cases.

AI is not something that investors can avoid or escape, so is it safe for pension funds to adopt?

Pension funds worldwide are in jeopardy

According to the “Mercer CFA Institute Global Pension Index 2023” report, numerous countries’ pension systems have “major risks and/or shortcomings that should be addressed,” with the United States being one of them. 

Many others, such as Argentina, are in real danger. Without improvements, “the efficacy and sustainability [of the pension system] are in doubt” in these countries.

Only a handful of countries, with the Netherlands taking the lead, have a “robust” and “sustainable” retirement system.

Pension funds need to avoid putting “at risk the well-being of current and future pensioners,” as stated in the 2022 “Pensions Outlook” of the Organization for Economic Cooperation and Development (OECD).

Systematic inflation isn’t helping, but the main problem future pensions will face is record-low birth rates, a phenomenon known as the “graying” of society.

This issue is primarily occurring in developed countries. For example, Japan has seen its birth rate drop to 1.25, the U.S. is currently at 1.66, and almost all European countries are breaking records, such as Italy’s rate of 1.22. A birthrate of 2.07 is generally considered necessary to maintain a stable population. 

The unavoidable demographic crisis is coming, meaning new creative solutions are required for pension funds to survive. So, what about AI?

AI for investment strategies 

The idea of using emerging tech such as AI for decision-making in investments shouldn’t scare people away.

Since the 1980s, programmable trading has been widely applied, with high-frequency trading changing the rules of the game.

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As the Mercer report notes, “Algorithmic trading now facilitates automatic trading across all asset classes and market segments.” Per the report, 60% to 73% of all U.S. equity trading in 2018 used this automated trading technique.

Pension funds could use AI tools for many different use cases, particularly to cut costs to be more cost-efficient.

The report mentions the many options AI could offer pension funds. Among them are:

• A deeper analysis of their clients’ behaviors by scraping data. This could offer optimal financial personalized products, helping against fraud along with other options.
• Double-checking the reliability of environmental, social and governance (ESG) stocks.
• Automatically narrow the differentials between passive and active investment strategies.
• Identify patterns and discover market sentiment and signals to suggest unconventional future investment opportunities.

David Knox, senior partner at Mercer and lead author of the report, pointed out the juicy possibility of pensions being able to gather higher investment returns thanks to AI:

“The ongoing expansion of AI within the operations and decisions of investment managers should lead to more efficient and better-informed decisionmaking processes, producing higher real investment returns for pension plan members.”

AI represents an ideal tool for aiding investors in making better decisions. The dilemma is whether AI could manage 100% of the decision-making, as algorithmic trading is automated nowadays.

Fortunately, there is a practical example worth considering. The AI Powered Equity ETF (AIEQ) uses the AI computer system IBM Watson, which aims to match “a team of 1,000 research analysts, traders and quants working around the clock.” AIEQ has $106 million in assets under management as of Dec. 1.

For now, the historical data of the AI-driven fund has offered mixed results.

Given this data,…