While a technology-led pension revolution has been heralded for some time, the reality is that pension technology still has a long way to go if it is to fundamentally change this US$40 trillion industry.
That’s not to dismiss the progress that has been made in some areas. However, the truth is that most of the innovation that has taken place still relies on the legacy systems that form the basis of this antiquated industry.
This is where blockchain technology comes in and natively addresses a number of deep-seated structural issues.
Progress so far
Before looking too far ahead though, it’s worth recapping what advances have been made and how that progress has differed across regions and jurisdictions.
Australia, for example, has embraced digital innovation more quickly than others. Web platforms and mobile apps that allow savers to instantly top up their superannuation funds have helped to encourage millennials to start planning for their futures, and are particularly well suited to younger, modern workers who move jobs more frequently and periodically find themselves out of work.
In the UK, the influence of fintech startups that are transforming the banking sector has also rubbed off on the world of pensions.
Major established players are now focusing funds and resources towards digital innovation programmes, like Scottish Widows who launched its innovation hub in Edinburgh at the start of 2016 and announced a £50 million investment in “redesigning the whole end-to-end customer journey”. Aviva, another giant of the pension market, is investing at least £100 million a year in its ‘Digital First’ strategy.
All of this investment is occurring at the same time as well funded pension, investment and robo-advisor startups, such as PensionBee and Nutmeg, make the headlines and gather momentum.
This is all having a positive effect on the way individuals engage and interact with pension products. By improving consumer accessibility to pension funds and reducing the reliance on paper-based bureaucracy, life is becoming easier for consumers.
However, there is only so much progress, in terms of reducing costs and allowing pensions to be aggregated, that such improvements can make.
To fuel real change, pension technology needs to tackle some of the key challenges that still exist in the system.
Still a long way to go
The main areas of inherent weakness include individuals’ control of their assets, the visibility and reduction of intermediary fees, portability of funds and the moral hazard that exists today.
In the current system of defined benefit and defined contribution saving plans, individuals don’t own the assets they deposit. Access to a user’s savings can be unilaterally restricted by their employer, bank or government by reducing payout or restricting timely access.
Another issue is the severe burden of high, unpredictable and opaque fees that can erode up to 80 per cent of the final amount received. These are caused by mismanagement and antiquated technical infrastructure in many of the major pension funds that are active today.
The opaque nature of the pensions systems not only makes intermediaries unaccountable but also means that many private pension schemes are confusing. The choice is between either bad or very bad plans and this lack of transparency often leads to poor returns and a loss of trust among users.
Finally, a lack of portability of funds restricts the control of individuals even further. While modern workers no longer have long-term jobs with a single employer for tens of years, pension products haven’t kept up with this change and the market is highly fragmented.
Self-employment and contract-based employment are rising worldwide, yet assets cannot be moved between plans. Individuals risk losing access to their savings and matched contributions or omit to consolidate them when switching jobs.
A trustless automated pensions system
What the next generation need is a completely new technology built from the ground up, using the blockchain to establish decentralised networks that are highly secure and transparent. This would mean individuals having their own chain of pension information that would travel with them and could move easily.
Distributed ledger technology offers a real alternative to the legacy pensions systems of today. The open nature of a distributed pensions ledger promises transparency built in at the protocol level. No single entity would be in control of the ledger. And once encrypted data is appended, it couldn’t be erased or edited.
People could also save in the knowledge that their funds will remain safe from raids by companies or governments, like when the National Bus Company was privatised in the late 1980s, the UK Treasury removed £168 million from the company’s pension scheme surplus.
By combining public and private blockchain technology with the latest thinking in digital asset management, a blockchain-based platform could also serve as a gateway connecting pension funds and fund managers.
A marketplace could emerge where users can shop around for pension products that best suit their needs, and manage their own retirement funds.
They could be subject to ranking and reputation mechanisms also — to determine which ones are performing well and meeting their commitments to users.
With the blockchain as the recording ledger, it would be difficult for malicious actors to game or defraud the system.
As such, all actors on the platform would be encouraged to act in everyone’s best interest, and a whole range of intermediaries that add little or no value would disappear as individuals choose the providers that are actually able to help them.
When you consider the current state of pension technology, this all might seem like a vision of the future that is many years away from being a reality.
But blockchain technology can help us design a whole new pensions ecosystem around the needs of the next generation — within months rather than decades.
Olya Green is head of content at Akropolis.