Blockchain is a "natural solution" to many of the challenges a collective defined contribution (CDC) structure poses for pension governance and administration.
A report - Smart Ledgers & Collective Defined Contribution Pensions, published by Long Finance yesterday - argues that a common problem in CDC is the possibility of "over consumption" today at the expense of future beneficiaries.
However, it added such over consumption is a function of the scheme rules and could be avoided by the consistent application of some "simple rules but effective rules" through the use of technologies such as blockchain.
Blockchain is a mutual distributed ledger which provides shared and synchronised databases in which consensus must be reached before transactions can occur. It eliminates the need for a central counterparty to act as a third party to financial transactions, relying instead on a decentralised peer-to-peer network secured by advanced cryptography.
According to the report, if blockchain were to be implemented for CDC, it would help ensure both inter- and intra- generational fairness; a key concern in pensions.
It could also provide consistent low-cost administration and make the assumptions and decisions of trustees more accurate and immutable. Moreover, trustees would have access to all of the chains and would be responsible for enacting the blockchain, it added.
The same report noted that a key challenge in using smart ledgers is ‘permissioning'.
"However, due to the nature of a pensions distributed ledger, this can be easily managed. There are two classes of user: trustees and members. Members have permission to view their own personal chains and the master fund chain. Active members are therefore able to make contributions, and pensioners are able to make payments, either as drawdowns or annuities."
The report was written by Leeds University Business School associate professor Iain Clacher and research fellow David McKee; and European Federation of Financial Analysts Societies market structure commission member Con Keating.
Speaking at a session to present the report, Keating said one of the benefits of using blockchain in CDC is that members will be able to see - in real time - both the net asset value of their pension and their pension income.
He said: "We can help restore member confidence in pensions with CDC pensions."
The report concludes that smart ledgers support transparency around decisions, costs and entitlements, and allow for better implementation of collective savings schemes, which will result in superior member outcomes.
Clacher added: "Ultimately, with applying Blockchain to CDC, if the technology runs properly, the output for the member is better because you can manage the risks of those who can't personally take the risks of defined contribution."
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