AI in scheme governance

The Pensions Regulator (TPR) has set out expectations for trustees to understand their schemes’ exposure to artificial intelligence (AI). Its new guidance calls on trustees to assess exposure across the whole portfolio, test resilience to an AI-related downturn and review concentration in passive investments.

The message is clear: trustees should understand how AI-related risks could affect their scheme, instead of assuming that diversification will offer sufficient protection.

More than a technology story

AI’s potential to transform businesses, improve productivity and reshape investment opportunities has been widely discussed. But TPR’s guidance brings a specific investment-governance question into focus: could schemes be more exposed to the AI success story than they realise?

That exposure extends beyond technology shares: if adoption disappoints or investment in AI infrastructure proves excessive, seemingly unrelated holdings could also suffer significant losses. That means holding several funds or investing across different asset classes may offer less diversification than trustees expect.

Start with understanding

We suggest beginning with trustee training to build a shared understanding of AI’s investment implications. This can help trustees ask informed questions and agree a proportionate programme of work that’s focused on their scheme’s circumstances. After that, TPR outlines four connected priorities:

1. Understand total-portfolio exposure: TPR asks trustees to identify direct and indirect AI-related exposure across the entire portfolio, drawing on information from advisers and investment managers. Reviewing funds individually may not reveal repeated holdings or common dependencies across a scheme’s investments.
2. Test resilience through scenario analysis: TPR expects trustees to test a severe but plausible downturn in AI-related assets and compare the results with existing stress tests. The assessment should consider losses, liquidity demands and changes in correlation, including whether the outcomes stay within the scheme’s risk appetite.
3. Review passive equity concentration: TPR highlights how market-capitalisation-weighted investments can become more concentrated as AI-related companies grow in value. For schemes holding passive equities, we suggest a focused review linked to the wider exposure and scenario analysis. This can help trustees assess whether the resulting concentration is appropriate for their objectives and risk appetite.
4. Challenge managers and understand assumptions: Active management does not remove the need for scrutiny. TPR also asks trustees to challenge managers on concentration, stress-testing assumptions and whether liquidity or leverage could amplify losses.

Taking action

Trustees don’t have to predict AI’s future. But they do need to understand their exposure and consider whether it warrants changes to investments, risk management or governance policies.

For support on this, speak to your usual Hymans consultant or get in touch. 

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