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Can Blockchain improve the pension industry?

Blockchain is a digital, distributed ledger containing transactions of all kinds from all over the world. Blockchain can store financial transactions, medical, and personal credit records, as well as account for supply chain flow, ownership, and legal contracts. Such transactions are stored as blocks.

There is no one organization overseeing the use of blockchain, allowing anyone to access it to verify transactional records. Records are secured via cryptography, preventing the alteration of transactions once they have been included in a blockchain.

The concept of blockchain was introduced alongside Bitcoin in 2008. Cryptocurrency has since become more widely accepted as a viable technology for financial transactions, with 90% of US and European banks having explored blockchain’s potential in 2018. By 2024, corporations are projected to spend $20 billion annually on blockchain technical services.

Clearly, the potential applications of blockchain technology go beyond cryptocurrencies like Bitcoin. Some experts even surmise that it can transform law, politics, global commerce, and more. But can this technology also help the pension industry?

5 Benefits of Blockchain to the Pension Industry

The pension industry is mired in major problems that stifle its growth. Blockchain can be the one solution to such issues, providing benefits in five key areas:

1. Security

In 2019, there were pension scam victims that lost over £1 million in retirement funds due to fraudsters, with losses averaging at £91,000. 2020 was not kind to pension plan members either, as pension fraud was the third most common financial scam as COVID-19 spread throughout the year.

How blockchain can help

Retirement is the stage in a person’s life where one expects to enjoy the fruits of their labour minus the shackles of a job. With this increase in cybersecurity breaches, however, retirees will find it even more difficult to lead a comfortable lifestyle that they prepared for years in advance. Their safety net might fail, and finding another means to generate income at their age could prove to be near impossible. In this context, blockchain can help through:

  • Improved security

Blockchain is virtually airtight, preventing any sort of tampering from typical pension fraudsters. Payments and investments are much more secure through blockchain, especially considering the rise in cybersecurity attacks since the pandemic started.

  • Better transparency

Because records cannot be altered or erased in a blockchain, people can rest assured that their pensions remain intact and that any hint of suspicious activity will be on full display.

A whole blockchain pension ecosystem would make it possible to prevent fund seizures and eliminate hidden costs via smart contract technology, as providers can send funds directly to beneficiaries. This would also encourage providers to improve their services, as consumers can easily see how each provider handles pension pots and make more informed decisions.

One of the recent applications of this is when the Bangladesh Computer Council (BCC) launched an initiative with IBM to create a blockchain solution for their primary school teachers’ pension system. The platform aims to provide secure and transparent pension processes that users can easily perform through the web or a mobile app.

2. Retrieve Lost Pensions

An estimated 1.6 million pension pots worth £19.4 billion are lost in the UK. In Australia, unclaimed pension pots in 2017 to 2018 amounted to around $11.3 billion (£8.27 billion). In the US, meanwhile, the number of unclaimed pensions stood at $58 billion (£42.43 billion) in 2013. One of the underlying reasons for these lost pensions is simply because of how much more people have been switching jobs throughout their careers.


How blockchain can help

Losing track of pension pots may not be a major issue when a person is younger. However, this will change once they near their retirement and start running the numbers. Blockchain can provide a solution for each person to keep track of their pensions regardless of how many jobs they’ve had in their lifetime.

Software company R3 has already developed a blockchain-based solution that can help people recover their lost pensions. The main issue R3 addresses with their solution is all the different, antiquated, and vulnerable methods pension providers use to verify pension holders’ identities. Consumers get lost keeping track of all the schemes they are signed up for.

With R3’s blockchain tech, consumers need only have one identity profile to access all their pensions. Using official government IDs such as passports and driving licences, this information can be used to verify profiles across multiple pension schemes. Moreover, consumers have full control over their profiles, so they can choose what personal information they want to disclose.

3. Streamlined Plan Document Review Process

Investing in pensions involves going through a process that can be influenced by several people, from account and fund managers, corporate boards and trustees, and pension plan representatives.

As such, there will be a large number of documents (e.g., contracts, and service agreements) that need to be signed, kept track of, and stored securely. There is also the matter of allowing all relevant parties to have access to the documents, which, if not handled well, can cause disorganization, and inefficiency, and may lead to lost files.

How blockchain can help

Source: Cognizant

Every single point of interaction with plan documents can be tracked on the blockchain. Whenever a reviewer accesses a plan document, the action is recorded and time-stamped. Updates are much more likely to proceed without losing track of which version of the document is undergoing revision.

Everyone involved in plan document preparation can be held accountable. Counterparties given access to the blockchain can review plan documents for their peace of mind. Owners of the data blocks can grant permissions to access specific segments as well.

The digital nature of blockchain can drastically improve the efficiency of the process. All parties can approve the final version through their unique electronic signatures.

4. Improve Pension’s Appeal to the Younger Crowd

Workplace pension apathy is high in the UK, with 80% of employees not knowing the total worth of their pensions and 91% not knowing where their pensions funds are invested.

Millennials are especially apathetic about their pensions for the following reasons:

  • Career instability — Millennials jump from job to job throughout their lives in the face of economic realities that make it challenging to find one steady, well-paying workplace and keep track of different pensions
  • Early adversity — The immediate difficulty of building a career during economic hardships while paying off growing student debt prevent millennials from contributing to their pensions.
  • Fear of missing out on life’s luxuries — Considering all the hardships millennials already have to go through with finding and keeping work, there is a great temptation to spend on luxuries that can make life easier in the present than to save for the distant future.
  • Information overload — There is much more readily available financial advice that millennials can get online, which can have the adverse effect of overwhelming them on what to do with their money and pensions in particular.
  • COVID-19Young adults were highly affected by the pandemic in 2020, experiencing big layoffs, fewer working hours, and lower wages.

How blockchain can help

The younger crowd has (wrongfully) gained a stereotype of being lazy and entitled with not a care for their financial futures compared with previous generations. However, study shows that this isn’t necessarily true and one way to ignite their interest in pensions is through technology.

In fact, one study points to the lack of digital innovation and uninspiring communication from the pension industry as a contributing factor. Blockchain introduces technology into pensions, making it more accessible to the younger crowd, especially since millennials are driving the Bitcoin economy with 20% of affluent millennials in the UK investing in cryptocurrencies.

5. Address the Retirement Savings Gap

A savings gap or a ‘pensions gap’ is the gap between a person’s current savings for their retirement and the savings needed to generate their desired income for retirement.

The latest study on the global retirement savings gap pegs it at around $70 trillion (£51 trillion). It’s about 1.5 times the annual GDP of every country that was part of the study. The gap is projected to grow 5% each year, reaching $400 trillion (£292 trillion) when 2050 rolls around, amounting to $28 billion (£20 billion) of deficit each day.

This savings gap is brought by a lack of easy access to pension plans or people completely abstaining from investing in one. Couple these factors with the increase in self-employed individuals, the ballooning gig economy, as well as the growing informal sector—many of whom do not invest in their own pensions, which further limits the returns of those who do invest in pension schemes.

How blockchain can help

Instead of trying to change individual saving habits, blockchain targets infrastructural reform to encourage overall pension participation. A blockchain-based pension ecosystem can streamline the entire process for beneficiaries with the added benefits of tighter data security and complete transparency.

NestEgg is a prime example of a blockchain-based pension product that promotes engagement and savings. Users can choose to invest in green energy technology such as solar panels and windmills. The returns they get can be put into buying greater ownership and further development of such tech, which can help bring down energy bills come retirement. Investments are crowdfunded, instilling a community-led approach to a financially and environmentally secure future.

The Challenges of Blockchain Implementation

Despite the great potential blockchain has for improving the pension industry, there are two notable obstacles that need to be addressed to ensure its successful implementation:

1. Cost

Technology is not cheap. Blockchain requires a significant investment from organizations to implement, especially on a grand scale. Individual pension funds and companies acting on their own would not even be enough to support a strong blockchain pension solution.

The pension industry would have to look into consortia to properly fund blockchain technology. Such is the case with R3, which requires the backing of over 200 global financial service firms to develop its blockchain-based pension solution.

2. Adoption

All stakeholders would need convincing that blockchain is a viable investment to adopt.

Retirement account data needs to be modernized across private and government organizations, with staff that might not be technologically savvy having to learn how to use blockchain. The top banks have to participate to cover individual retirement account rollover data.

Consumers must be presented with user-friendly apps to an interface unless they find blockchain technology intimidating. These tools would have to be comprehensive as well, covering contributions from all parties and other important pension data.

Preparing for Blockchain-based Pensions

The pension industry has much to gain from moving towards blockchain technology. From tighter security and increased efficiency to higher youth engagement and trust through transparency, the upsides are transformative. These massive positive changes, however, would require a similarly massive effort from the industry at large.