The field of Artificial Intelligence (AI) seems to operate in a different world to pensions. But there’s a science to thinking about pension scheme asset and liability models that takes a remarkably similar approach to an AI program’s approach to winning a game of Go.
Google’s DeepMind, based in London, is at the forefront of spectacular progress in AI over the past few years. This includes impressive advances in the ancient Chinese board game of Go in the space of two years. Their program is called AlphaGo.
What makes AlphaGo so good? A huge amount of processing power and some very clever programming obviously have an awful lot to do with it. The success of AlphaGo over other AI programs lies largely in optimisations and subtleties of execution that, in another career, I would love to study in detail. But its advantage, and many other AI programs advantage, over humans can be largely understood in terms of its basic approach:
Understanding the approach leading to AlphaGo’s success can help trustees win their own very serious game of ensuring all pensions can be paid
I won’t pretend that asset and liability models are nearly as complicated as those used by AlphaGo. However, an approach I prefer to tackling the problem of setting long-term investment strategy for pension schemes, shares some remarkable similarities to how, fundamentally, AlphaGo tries to win:
Possible metrics to judge the attractiveness of an investment strategy are numbers such as:
Like AlphaGo, models can be set up to come up with some counterintuitive solutions. For example, in some circumstances allowing for covenant risk should not necessarily lead to taking less investment risk.
Go and financial markets are two very different beasts. The latter is far more uncertain and complex, which perversely can mean that overly complicated approaches can obfuscate more than they add value, and a large degree of human oversight is needed (so hopefully the robots won’t be replacing me just yet). However, understanding the approach that led to AlphaGo’s success can help trustees win their own very serious game – ensuring all pensions can be paid as they fall due.
The UK inflation-linked government bond ('linker') market is dominated by vast UK defined benefit pension schemes. Derisking by schemes tends to increase demand for linkers as equity prices rise, pushing up their prices. For multi-asset investors seeking diversification, that could make them less attractive to buy.
“Life and death. At some point we’re gonna leave this world. Do I know when? Absolutely not.” - Terrell Owens
After the superbowl it seemed fitting to quote a former Philadelphia Eagles player. Estimating how long we’re going to live is as old as (intelligent) life itself. In the world of actuarial science, this means predicting the amount a firm will need to pay out to pensioners. Recent data readings have shown that the projected rate of growth of life expectancy was potentially too high. So what does this mean for pension schemes?