Pros and Cons of Technology in Pension Funds

In the previous article, we have already seen how fintech is changing almost every aspect of pension fund management. The fact that technology is in the process of revolutionizing the pension fund industry is no longer a secret. Pension funds do not have any option other than adapting to technology. This adaptation is revolutionary given the fact that pension funds were once thought of as being amongst the most conservative investors.

However, such adaption comes with its own share of pros and cons. This article makes an attempt to enumerate the various pros and cons that pension funds have to offer.

Benefits of Technology for Pension Funds

The most important benefits that pension funds gain from the deployment of technology have been listed below:

1. Improves Communication: Communication between pension funds and investors is very important. It is also the most neglected aspect of pension fund management. Technology is helping reimagine how communications take place between investors and pension funds. Pension funds are now able to provide a dashboard to investors. Such a dashboard allows investors to understand how their investments are performing.

   Investors can make adjustments to their investment plans accordingly. Interactive dashboards can also be used by companies to ensure that investors are made aware of how close they are to their retirement goals. Such communication has the potential to convince investors to increase their allocation toward pension funds.

2. Facilitates Choice: Defined contribution pension plans are now the most common type of plan in the world. This means that investors have full control over the asset classes in which their money is invested. This also means that investors have the responsibility to choose the correct asset classes and keep rebalancing their portfolios from time to time. Technology makes such rebalancing effortless. Investors can simply log on to a portal and make changes at the click of a button.

3. Automation of Administrative Tasks: Pension funds regularly undertake securities transactions. Hence, there is a lot of paperwork and also administrative tasks which the fund has to follow. However, these administrative tasks often slow down the speed at which the fund operates.

   The power of technology can be leveraged to automate several tasks which are manually undertaken by the fund. This helps them reduce the amount of manpower required to administer the fund and hence lowers their administrative costs.

4. Better Compliance: Lastly, since pension funds are closely regulated, they need to submit a lot of reports to investors at different time intervals. Investors can use technology to automate the creation and dissemination of such reports. This helps pension funds stay compliant without spending excessive amounts of time, effort, or money in the process.

Disadvantages of Technology for Pension Funds

Technology has also negatively impacted the pension fund universe. There are several disadvantages that pension funds have to face because of the proliferation of technology. Some of the disadvantages have been mentioned below:

1. Privacy Risk: Extensive use of technology means that sensitive data about the financials of millions of investors are stored on the servers of the pension funds. There is always a chance that the pension fund may face a cyber-attack. Such an attack may end up compromising the sensitive financial data of many investors. This could cause irreparable damage to the long-term business of the firm. The problem is that even if pension funds spend millions of dollars trying to secure the data, they can never really be sure of its safety.

2. Financial Exclusion: Another problem with the rapid digitization of pension funds is that it is exacerbating the digital divide. This means that pension funds are creating more and better features for people who actively engage with technology. At the same time, people who do not engage with technology cannot access these benefits. The problem is that a large number of pension fund customers are old and hence not very tech-savvy. There is a clear demarcation between how young investors react to technology versus how old ones do.

3. Regulatory Jurisdiction: The proliferation of technology means that companies are increasingly turning to automation and offshoring to increase efficiency. This also means that the data of customers is being passed on to companies that are located in other countries.

   Now, the problem is that the regulators do not have jurisdiction over how data is utilized, processed, and secured in other countries. However, if there is a breach of data security, the consequences have to be borne by the customers. Regulators are finding it difficult to create laws for the borderless world which is enabled by technology.

4. Expensive to Replace: Another big problem with technology is that it can be expensive to replace. For instance, older pension funds have spent billions of dollars while creating their legacy systems. Now, over time, newer technologies have come into existence. Also, the cloud-based software as a service model has gained traction. Hence, newer pension funds with smaller budgets also have access to better technology as compared to bigger funds. Hence, pension funds always face the risk of their technology becoming obsolete.

The bottom line is that technology has opened up a whole different world for pension funds. There are many benefits and also disadvantages which never existed in the previous years. Hence, the pension funds which are able to adapt quickly are likely to obtain a sustainable competitive advantage over their peers.