Analysis reveals that European countries boast some of the world’s most favorable pension systems, with AI exerting a growing influence on their functionality.
According to a recent global pensions report by the Mercer CFA Institute, the Netherlands stands out as the top performer when comparing pension systems worldwide. The assessment, which examined over 50 indicators across 47 retirement income systems, encompassing 64% of the global population, highlighted key factors such as the availability of private and public sector pension benefits, the sustainability of the system over the long term, and the effectiveness of governance.
While Iceland claimed the second position, Denmark secured third place in the 2023 index, displacing last year’s top-ranking country.
The majority of European countries assessed in the report received positive evaluations, with only a handful requiring minor enhancements. The report suggests areas for improvement in Finland, Norway, Sweden, the UK, Switzerland, Ireland, Belgium, Portugal, and Germany.
Conversely, France, Spain, Italy, Poland, Austria, and Croatia, alongside the US, face significant risks and/or shortcomings that require attention, according to the report.
At the bottom of the ranking are India, the Philippines, and Argentina. Alongside Turkey and Thailand, they received the lowest grade, D, indicating serious doubts about the effectiveness and sustainability of their pension systems without any improvements.
Risks in the system
The report acknowledges that ‘retirement income systems around the world are under pressure as never before’, due to the currently persistent inflation, the rising interest rates and the geopolitical uncertainty, which inevitably affects investment returns.
“The average age of populations around the world continues to rise in many markets, mainly more mature markets,” said Margaret Franklin, president and CEO at the CFA Institute.
“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,” she added. “These are just a few of the increasingly complex challenges that pension funds face that impact retirees in significant ways.”
The report cites the OECD’s 2022 Pensions Outlook, which advises policymakers worldwide to proceed with essential reforms despite prevailing financial and economic uncertainties. This proactive approach is urged to safeguard the well-being of both current and future pensioners.
Furthermore, the report advocates for the enhancement of asset-backed pensions, as opposed to pay-as-you-go systems. This shift could facilitate diversification in retirement financing sources, thereby bolstering the resilience of pension systems.
The impact of artificial intelligence on pension systems
The report suggests that artificial intelligence has the potential to enhance pension performance by reducing costs and pinpointing imminent risks.
Furthermore, AI could be utilized to develop personalized portfolios and detect market irregularities. However, the report notes that while AI may assist in these areas, it is unlikely to accurately predict market movements, leaving a level of uncertainty.
“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,” said David Knox, senior partner at Mercer, according to a Reuters article.
The annual survey also pointed to risks of AI models generating fake information when used in a new context, and of cyber-attacks against pension members’ data.
