PENSIONS
Henry Tapper, chief executive officer for AgeWage , discusses the future of pensions administration, assessing current methods across the globe P ensions administration is an area in which innovation could radically change the quality of our later lives. providers. By definition, implementing a central ledger solves both the small pot and lost pot problems and it also doubles as a pensions dashboard. Should pensions administration centralise or move to the blockchain?
property of each person and stored in the decentralised ledger. But there are as many possible standards for a decentralised ledger as there are companies interested in developing it. For this vision of the future to materialise, governmental interventions must establish standards. Strong nudges are required to encourage all providers to adhere to the standard. But without government interventions, progress will inevitably be limited. Of course, the pensions administration challenge isn’t confined to Chile. Despite the United Kingdom’s large financial sector and professional pension industry, the nation has a surprisingly underdeveloped public IT infrastructure. At first glance, it seems strange that Stockholm, a relatively small city geographically located in the periphery, can compete with London as the top European hot spot for tech start-ups. Perhaps the fact that the public IT infrastructure in Sweden is well developed has something to do with it? Unfortunately, it seems difficult to initiate important digital infrastructure projects, such as developing a standard for a decentralised ledger. Access to a modern digital infrastructure would transform the pensions industry, create new jobs and provide better value for money for savers. So, what are the recommendations for policy makers? Well, the simple answer is that ‘it depends’. Centralised administration requires the government to set up and operate an effective administration business. The decentralised ledger requires standardisation and access to a vibrant start up scene. In practice, there’s a range of solutions between the two extremes, so each country must find a solution which works in their specific situation. In the long-run, I expect the decentralised ledger to gain ground but until then, it might be an idea to focus on improving the public digital infrastructure and explore a centralised ledger. n
The administration of pensions is all about: l collecting contributions l ensuring you know who everyone is l executing changes between investment funds l paying out pensions. In countries with a weak public information technology (IT) infrastructure, manually tracking and tracing individuals is expensive. Most savers have several pension pots spread across different pension providers. This means administration costs are multiplied across the providers, creating inefficiencies across the entire pension ecosystem. Let’s take a look at the global pensions scene The Chilean pension authorities are currently focussed on how to reduce friction and increase efficiency across the pension system. The government is getting involved as it views workplace pensions as an extension of the social security system. It’s a mandatory ‘self-financed’ complement to the state pension. Chile is considering increasing efficiency by centralising the pensions administration system through a government agency. The opposing view is that the market will resolve the problem through adopting new technology. This is the classical centralised vs decentralised discussion. Unfortunately, the best path forward isn’t always clear, and most solutions require some government involvement. Let’s have a closer look at two extreme cases. Proponents of a centralised solution often refer to the Swedish Premium Pension (which is part of the state pension) as an example of a centralised model. The Swedish Pension Authority holds the central ledger and the saver is free to choose from a vast number of mutual funds provided by external
Proponents of a decentralised solution argue that modern technology, such as blockchain, makes it possible to implement a decentralised ledger. This is an interesting idea that’s worth exploring a bit further. Looking back through history, standardisation across many different systems has enabled major steps forward. Metric and imperial standards were literally the nuts and bolts of the industrial revolution. With a common standard across all producers, it was easy for challengers and innovators to create new types of machinery by combining existing components. "Looking back through history, standardisation across many different systems has enabled major steps forward" Standardisation effectively lowered the bar for innovation since all nuts and bolts had the same thread. This meant that companies no longer had to be vertically integrated to deliver new and innovative machinery. The value of block chain technology can be unlocked when there’s a standardisation of the protocols around a decentralised ledger. With a national standard, specialised providers can emerge, focussing on a specific part of the value chain. This will significantly lower costs and open the market to new services and business. And a decentralised ledger can solve many data governance problems. All pension data relating to individuals is the
| Professional in Payroll, Pensions and Reward | June 2023 | Issue 91 49
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