Reinventing Pensions using Blockchain
February 10, 2017. Five students of the Blockchain Education Network (BEN) enter the Dutch Blockchain Hackathon with the ambition to change the pension system as we know it for the better. How? By bringing trust back into pensions through introducing (more) transparency, efficiency and more autonomy to the individual. Sounds like a utopia? Let me introduce our blockchain solution that won the 48-hour competition.
Meet NestEgg.
Meet the future of Pensions.
Problem Statement
Pensions are in need of updating to prepare for a transitioning economy from manufacturing- to service based. There is a decreasing ratio of working people:retirees because of an aging population, people are switching employees more often then in the past and there is an increasing trend of independents (startups, freelancers, fast changing careers) that don’t add up/build a “second pillar” of funds through a large employer. Also, the coverage ratio, the ratio between the total capital available and the pension pay-out, has been below 100% for the past two years. Individuals have a difficult time understanding their pension and what they can expect of their future, which indicates that either it is too complex to understand or there is a lack of transparency. This is seen in studies showing a lack of confidence in pensions, which also exacerbates individuals choosing not to invest money into them. These developments ask for a new way of organizing pensions. Therefore, Nestegg, in collaboration with APG, is starting a 6 month exploration process to build the idea presented in the hackathon into a real prototype.
Solution in Theory
We aim to simplify legacy pension infrastructure with a blockchain infrastructure, to create an auditable trail of every individual’s pension. This transparency and audibility is an upgrade compared to current pension infrastructure, because in the current system it is very costly to realize this. NestEgg decreases overhead for managing accounts, gives users transparency to exactly what they are owed, eliminates the need for fraud departments, and allows user-profiles to be easily transferred between companies without data loss or data corruption. Upgraded and more lean and efficient pension infrastructure then opens up the ability to incorporate future diversified income streams (crowdfunding community projects, investing in future services, etc). This allows for the pension company to offer services to independents or existing users to diversify their 2nd and foremost to develop the individual insurances in the 3rd pillar.
Moreover, we want to offer an opportunity to the customer to invest their savings into the 3rd pillar, which would consist of investment projects in which they can decide what to invest in. This gives the user agency to choose where their pension investment goes and stimulates the relationship between customer and pension provider. Normally, individual’s savings have to be stored in the bank on which they have to pay taxes. This system aims to gain back trust from users by giving people the opportunity to invest their money into long term projects they support with the ability to check the amount paid out when they retire. Also, this pillar should be aimed at independent workers and the part of people’s income that raises above 100k which normally people would get added on top of their income instead of transferring 20% of that to the pension provider.
Solution in Practice
Each person has his or hers individual chain which the pension company maintains. We use a layer built on top of Bitcoin to record the hashes of documents and transactions. Assets will be tokens, so each chain issues it’s own assets with own tokens. The pension company will record all interactions with one’s pension on the blockchain and move tokens accordingly. This gives them a solid immutable audit trail. The transactions would include hashes and locations of human-proof documents (checks/forms/etc).
Our prototype allows to move tokens on a chain to be moved to other chains. This allows someone, when they switch employer/pension company, to move their accumulated pension to a new fund (currently it often stays at the pension company you are assigned and you receive the years you worked for them times the rate +/- 1.875% back when you retire). Also, if you allow tokens on a chain to be moved to another, it allows someone to inherit a pension if their spouse passes away or if a kid becomes an orphan (both chains get combined because the tokens although on different chains, have the same value). And we keep the other chain’s meta history as all data in the layer is permanent and immutable.
It also allows a pension fund to be absorbed by other funds. If the fund is transferred, they move all the pensions in the blockchain to the new holder. And if the new company doesn’t want to do blockchain, they simply move their chains to non-existent chains to show the sale for audit reasons.
This is an immutable audit trail implemented on the Bitcoin blockchain. If one has to review history or audit something, they will have a timeline that can span company sales, can span inheritance, and all other interactions in 1 spot. No information that is private needs to be shared, but we can include location of files, so when one goes through the history, one can use their existing audit methods and use the individual’s chain to prove the negative (prove no missing files). This means that if a person 25 years later claims they added money to their pension which they didn’t, the pension company can prove this is not true. If the document does not exist (and it is integrated properly), then they can prove they have all the documents and there is a fixed number of them.
Why use blockchain over a database?
Using blockchain, users now have the ability to mathematically prove every payment into their pension and what they are entitled back. Plus, if employees change companies, they can choose to move their tokens to a new company. This makes it easier to interact real-time and always be able to check the value of their pension. Adding the feature to invest your savings into investment projects, would add massive administration work for pension providers in a database and users will have no real proof it happened, whereas using blockchain in which each user already has a chain, it’s just a matter of upgrading the amount of tokens or assign tokens to the specific client and the client will immediately notice the change of records.
Moreover, the administration costs of using this over the old system leads to an estimated 70-80% costs reduction. Due to confidentiality concerns, we can’t elaborate on the cost overview. But you can imagine that pension infrastructure and processes designed in the 50s has plenty of room for optimization.
Why would YOU want NestEgg to succeed?
Have you ever been in the situation of receiving a letter from your pension fund of which you didn’t really know what it meant? What if instead of an annual letter, you could use a frontend that monitors all the assets in a dashboard and lets you, the customer, check real-time what value their pension is worth and what projects their money is invested in. This causes your pension to be transparent with real time rates. NestEgg makes it easy to invest more in your pension than just the part of your income, to save for your later years. Independents who don’t pay pension via their income, now have an easy opportunity to save in a pension fund. NestEgg let’s you choose projects, either based on current ROI rates or projects you are interested in. The autonomy belongs to the user, being you. By using NestEgg the administration costs in comparison with the current system go down by 70-80%. Every euro right now is worth exponentially more in the future. So every euro saved right now over being used for administration costs, ends up at the value of your pension. All these reasons together let the total pot in pension funds grow, making the coverage ratio aboven 100% again and offering you a safe future after being 67 years old.
Why do pension providers want this to succeed?
Pension providers have a difficult time reaching their customers and build relationships with them, even though those are long term relationships. People think pensions are too difficult to understand and don’t really think about it until they retire while in contrast these same people are worried if they can actually pay their old day with the amount saved up. Making use of NestEgg, the user gets autonomy and through the transparency gain trust in the system. Furthermore, the biggest costs for pension providers are the administration cost. Using NestEgg, current administration costs are lowered by 70-80%. The coverage ratio has been below 100% for the last 2 years. By saving costs and getting more people into the system, this coverage ratio can become higher than 100% again.
Team NestEgg will be working on this for the coming 6 months. Follow Dean Masley and me on Medium to get updates about our project as we learn about pensions and how to prepare your financial well-being for the 21st century ;)
