August 31
Can we gain from the Blockchain?

If comments in the press are anything to go by, we are on the cusp of the next big shift in technology and its potential to transform the way we do business and even lead our daily lives. Dubbed the “Internet 2.0”, the Blockchain is actually a form of Distributed Ledger Technology, a method for securely processing and recording transactions in a shared ledger that is stored across a decentralised network. The Blockchain was first introduced via a paper published by the mysterious Bitcoin creator Satoshi Nakamoto in 2008, with initial applications for facilitating peer to peer electronic payments, i.e. without the need for financial intermediaries such as a bank or clearing house. This paved the way for the introduction of the cryptocurrency Bitcoin which relies on the Blockchain infrastructure.

The early adopters of the Blockchain all lie in the financial services sector, with applications for payment processing and information sharing probably being the easiest to design and implement. Pension schemes, being a big player in this sector, will no doubt have to embrace this technology as it matures. Some of the more obvious implications are set out below.  

Pension scheme administration

It is likely that this will be the first area to employ the power of the Blockchain. Currently a huge amount of resource is used for the ongoing administration of a pension scheme. Each member has hundreds of data items relevant to their benefit entitlement, this not only has to be stored securely but also continually updated in line with their membership status and any benefit events. Blockchain technology could be used to record an entire history of members’ benefits, with each calculation or data update being time-stamped and verified along the chain. The transfer of member data over to a new provider, for example, would then be far more efficient than is currently the case.

Investment

Just like traditional currencies, the primary function of cryptocurrencies such as Bitcoin is to facilitate the payment for goods and services. However, there is also a secondary market built on speculation, hence the wild swings in value seen since their inception. In spite of this, should pension schemes be considering cryptocurrencies as an investment? Even if the trustees or employer believe that the currencies are overpriced, traditional investment techniques such a short-selling all apply to cryptocurrencies as they would any other.

Buying out members’ benefits

One of the key facets of the Blockchain is the ability to share information that has been accepted and verified by all parties (everyone singing from the same hymn sheet if you like). Imagine a pensioner buyout exercise, there are several parties involved; the employer, the trustees, actuaries, lawyers, insurance company, re-insurer, investment advisors and custodians. Typically such exercises can be held up due to information asymmetries between these parties. However with the Blockchain everyone has access to the common ledger of information, with surety over the quality of that information and a clear history of when changes have been made and by which party.

Business change

The introduction of Blockchain technology has the potential to dramatically disrupt some of our industries. It is a fact of capitalism that companies can and will fail over the long term (see our Risk of Ruin report for more detail on how this applies to pension schemes and their members). Blockchain has the potential to accentuate this even further, particularly for entities that act as intermediaries or alternatively just companies that are slow to realise the benefits of this technology and suffer as a consequence relative to their competitors.

As proponents of the Blockchain claim, the possibilities for the technology are endless and the pensions industry is no exception. Watch this space.

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