Pensions on Blockchain: Strengths and Weaknesses
Given that the global pension deficit is estimated to reach USD 400 trillion by 2050, people expecting to retire in the coming decades have plenty of reason to be worried. However, even though solving the pensions crisis is likely to require considerable societal, economic and political shifts, blockchain technology could provide a way of easing many of the factors that make the crisis worse.
Smart-contract-based pension fund
It’s with Berlin-based startup Akropolis that the claims regarding blockchain’s potential are made most strongly. Established in 2017, its blockchain-based platform aims to “address the pressing pain points and prevent the mistakes of the old [pension] system from occuring in the future,” as CEO of Akropolis Anastasia O. Andrianova tells Cryptonews.com.
Initially, Akropolis’ "decentralized pension platform" should be based on the Ethereum blockchain once it launches in Q4 2018, although it aims to be a "blockchain-agnostic pension provider" in the long term. The main premise guiding its development is that pension holders suffer from having “no control over their own assets […] no visibility over fees charged on pensions and investment products (ref. fee erosion which can reach up to 80% of the final amount in some cases) [and] no portability of pensions contributions as they change employment,” as Andrianova says.
She also explains that Akropolis’ decentralization would provide pension holders with a clear and transparent ledger showing them their pension contributions, savings and records, which can all be transferred from one employer to the next seamlessly.
Blockchain tech could provide pension holders not only with tamper-proof records, but also with the ability to communicate with pension funds without having to go through value-sucking middlemen.
Ray Mody, Head of Technology Transformation & Investments at PwC, one of the Big Four auditors, tells Cryptonews.com that such simplicity could have big potential for the pensions industry.
"You can see how the whole process, and number of intermediaries involved, in managing a person’s long-term savings could be radically simplified," he says. "As well as cost and time savings arising from that, it’s also likely to allow savers a more intuitive and trusted way of interacting with their savings status and decisions, which might well prompt better engagement and a commitment to save more."
Auctus is a British Virgin Islands-registered company that’s also building a decentralized platform for retirement products that’s due to have its beta release in Q3 2018. It uses Ethereum-powered smart contracts to ensure that fees are paid transparently and only when the customer has been provided with promised services.
Another startup is the Netherlands-based NestEgg, which plans to use a blockchain-based crowdfunding platform to help individuals invest and save for their retirements. It also uses Ethereum-based smart contracts, although in its case it’s using them to enable groups of savers to collectively buy, own and sell various assets, thereby helping these groups to earn a post-employment income.
No magic solution
NestEgg, Auctus and Akropolis don’t represent the only attempts to reform the pensions industry via blockchains, with such financial service providers as APG, Deloitte and KPMG all trialling platforms that harness distributed ledgers in one way or another to improve the efficiency and value for money offered by pensions.
However, while Andrianova has stated that, by turning to blockchain, "our pensions community can tackle the pensions crisis and ensure a secure future for many,” she and other commentators admit that the use of distributed ledgers alone won’t be enough to significantly reduce the growing pensions deficit.
"On the subject of solving legacy pension deficits in defined benefit plans, I suspect there will be a limited role for blockchain," says Ray Mody. "Beyond the second-order spin-off consequences from having faster and clearer access to asset information, the reality is that historic pension deficits are a function of major economic and demographic factors – the risk and returns on different assets and the consequences of changing life expectancies for example."
Mody acknowledges that blockchain could streamline the industry and even give birth to some novel pension products, but he concludes, "as a technology by itself it won’t be a magic solution to solve deficits."