Can Blockchain Breathe New Life to a Struggling Pensions Industry?
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Pensions used to be the main way people saved up for retirement. Old timers were particularly content staying on and becoming lifers in their jobs because of the financial security that pensions promise.
Experts have been warning about a pensions crisis for the past several years. Various pension and social security funds all over the globe are now vastly underfunded. The World Economic Forum (WEF) estimates that the gap between the assets held by pension funds in the eight largest economies and what they are due to pay out will balloon to a whopping $400 trillion by 2050.
This is partly due to the increasing life expectancy especially in developed countries. Better medicine and healthcare allow people to live longer than previously projected. Pension funds now have to pay out retirees for additional years of life that haven’t been factored in their initial contributions.
Funds are also rendered insolvent due to dwindling savings and gains. While this has been partly due to the economic uncertainties of the last decade, this is also caused by mismanagement. There have been an alarming number of reported scandals involving pension officials who grossly mismanaged or pilfered funds.
What’s worrying is the lack of aggressive and innovative solutions that have been directed to fixing these problems. Various legislations are being pushed forward for governments to provide new bailout packages though these have been met with much criticism. Traditional financial institutions are even capitalizing on the crisis by encouraging workers to move away from pensions and invest in other vehicles.
Yet, well-meaning stakeholders in the pensions industry can actually look towards technology for possible solutions. Blockchain, which has revolutionized financial services, can be applied to pensions. The technology offers mechanisms which can provide fund members protection from malicious actors and even win back people’s trust in pensions.
By actually focusing on the pensions industry, blockchain startup Akropolis has set a goal to improve our retirement and pensions plans. The company is building a blockchain-based pensions infrastructure that seeks to address the many ills that plague pensions and establish a more sustainable ecosystem.
The project enables users to take better control of their pensions. Users can sign up on the platform and get the option to move their existing portfolio to their accounts. Through blockchain’s transparency, users will be able to audit their portfolios’ performance at any given time. They can also check how their chosen funds are performing. Traditional pension funds typically lack such mechanism only providing updates on contributions when requested. Some provide no information to members at all.
Users will also be able to shop around for various pension products that suit their needs through a decentralized marketplace.
A decentralized pension marketplace also serves as a gateway for institutional stakeholders such as pension funds and fund managers to connect with each other. The dynamics between these two entities are critical for pension funds since managers are the ones charged with growing the funds’ money. They have to ensure that they are savvy enough to make the fund solvent and sustainable down the line.
Unfortunately, it is often through the involvement of these middlemen where corruption occurs. In order to safeguard this layer, institutional participants on the platform have to undergo vetting. The platform will also have a reputation and rating system to grade funds and fund managers. Top performing fund managers gain access to more institutional clients while top rated funds attract more members.
Since blockchain is used for recording transactions on the platform, it will be nearly impossible for these agents to manipulate or fudge their performance. Blockchain’s immutability and transparency also encourages participants on the platform to act on good faith and in the ecosystem’s best interests.
The platform is slated to initially use the Ethereum blockchain. Earlier this year, Akropolis also joined the Ethereum Enterprise Alliance. However, the platform is planned to become blockchain-agnostic in later developments. This would allow the startup to support various crypto assets tokenized through other blockchains.
The WEF points out the need for key changes in the pensions space such as creating easier ways for people to save and providing them clear and accurate information concerning their pensions. A blockchain-based platform readily meets these needs.
The capabilities offered by decentralized platforms are crucial in creating new mechanisms that can solve the pensions crisis. The availability of such an alternative to traditional pensions should be encourage people to reconsider it as a viable investment vehicle to build their retirement funds.
Renewed trust in pensions could be the lifeline that the industry needs to stave off a collapse which would be calamitous for just about everyone.
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