A comprehensive analysis, evaluating pension systems across 47 nations, has illuminated the growing influence of artificial intelligence (AI) on pension structures. The Mercer CFA Institute’s global pensions report has positioned the Netherlands as the world leader in pension system excellence.
This extensive ranking examined over 50 key indicators, scrutinizing 47 retirement income systems, which collectively cater to 64% of the world’s population. Critical metrics encompassed the extent of private and public sector pension benefits, long-term sustainability, and the quality of governance. In the 2023 index, Iceland secured the second position, relinquishing last year’s top slot, while Denmark secured the third spot.
European countries, for the most part, received commendable scores in the report. Minor enhancements are suggested for Finland, Norway, Sweden, the UK, Switzerland, Ireland, Belgium, Portugal, and Germany. Conversely, France, Spain, Italy, Poland, Austria, Croatia, and the United States, along with other countries, grapple with significant risks and deficiencies that warrant attention.
Grade Ranking of Pension System
At the lower end of the rankings, India, the Philippines, Argentina, Turkey, and Thailand find themselves sharing the unenviable grade of ‘D’, signifying concerns regarding the effectiveness and sustainability of their pension systems. The report underscores the challenges faced by retirement income systems worldwide due to mounting inflation, rising interest rates, and geopolitical uncertainties, all of which impact investment returns.
In the face of steadily increasing life expectancies, the global landscape of aging populations continues to evolve, with a marked uptrend particularly evident in more mature markets. Margaret Franklin, President and CEO of the CFA Institute, recently shed light on this demographic shift, underlining how inflation and the ascent of interest rates have injected a new dynamic into the pension landscape.
Artificial Intelligence’s Impact on Pension Systems
Speaking on this matter, Franklin stated, “Inflation and rising interest rates have created a new market dynamic that poses significant challenges to pension plans. We also see continued fracturing as it relates to globalization. These are just a few of the increasingly complex challenges that pension funds face that impact retirees in significant ways.”
The CFA Institute’s observations echo the concerns articulated in the OECD’s Pensions Outlook report for 2022. The OECD has recommended that policymakers worldwide embrace necessary reforms, despite the prevailing financial and economic uncertainties, to safeguard the well-being of both current and future pensioners.
Furthermore, the CFA Institute’s report suggests enhancing asset-backed pensions, as opposed to the traditional pay-as-you-go model, to diversify funding sources for retirement. This move is seen as a means to bolster the resilience of pension systems in the face of ongoing challenges.
The report also delves into the promising role of artificial intelligence (AI) in reshaping pension systems. AI’s potential to streamline processes, reduce costs, and identify forthcoming risks is highlighted. Moreover, the report envisions AI’s capacity to tailor customized investment portfolios and detect market irregularities. However, it emphasizes that AI’s predictive abilities concerning market fluctuations remain uncertain.
David Knox, Senior Partner at Mercer, shared insights on AI’s evolving role, stating, “The ongoing expansion of AI within the operations and decisions of investment managers could lead to more efficient and better-informed decision-making processes, which could potentially lead to higher real investment returns to pension plan members.”
