Blockchain Technology Hits the Retirement Plan Industry

Pension & Benefits Daily™ covers all major legislative, regulatory, legal, and industry developments in the area of employee benefits every business day, focusing on actions by Congress,...

By Jasmine Ye Han

Auctus, a startup company that’s aiming to build a platform for blockchain-powered pension funds, is launching the presale for its initial coin offering Oct. 3.

It comes at a time when some of the largest retirement service companies are trying to tap blockchain technology because of its potential to increase efficiency in record keeping, document sharing, transaction settlements, contract execution, and business collaboration.

Blockchain is a real time distributed ledger system where every device in the network has a live copy of the ledger. Cryptocurrencies like Bitcoin and Ethereum are enabled by blockchain. Although there’s some controversy over cryptocurrencies given recent crackdowns in some countries, many industries are trying to adopt the technology.

“We’re very excited about the potential blockchain has for us as a record-keeping system. It’s definitely a more secure record-keeping system than we already have in the industry,” said Roshina Nandra, vice president of Prudential’s retirement innovation lab, where Nandra leads the research and development of blockchain usage in retirement services. Prudential first began exploring the technology three years ago, and started building proofs of concept two years ago.

Fidelity also has explored the technology for at least three years. It has partnered with academia in blockchain and cryptocurrency research, and has made venture investments in some startups in the area. Fidelity Labs, the company’s innovation group, has been doing research and experiments in the area.

“Blockchain technology isn’t just a more efficient way to settle securities -- it will fundamentally change market structures -- and maybe even the architecture of the Internet itself,” Fidelity CEO Abigail Johnson said this May at a blockchain conference.

Smart Contract: ‘Automated Decision-Making’

A pension plan is nothing more than a contract, where you’re obligated to make certain payments and guaranteed to get payouts at a certain time, Raphael Vantroost with Auctus told Bloomberg BNA. That’s where the smart contract comes in.

A smart contract includes provisions that can execute automatically when predefined conditions are met. It’s a feature introduced by the Ethereum blockchain, while the Bitcoin blockchain is a distributed ledger system currently limited to transfer of currency.

The Auctus platform, if built successfully, would automate contribution collection, pension payouts, and audit reporting, with the terms written into the codes, Vantroost said. “In the case of an employer-sponsored plan, the contribution match calculation and vesting rules will also be established in the smart contract code,” according to the Auctus white paper.

Many small pension plans still work with spreadsheets, and manual processes open the door for people to manipulate or make errors, which could potentially cause a big loss, Vantroost said. While larger plans often use a business management system that automates the process, the software is usually expensive, and a blockchain-powered platform is a better alternative, he said.

Smart contract increases efficiency because it enables “automated decision making,” Prudential’s Nandra said. She didn’t mention any specific experiments related to retirement plans but said the company is exploring the use of smart contract to create other “smart products.”

“Take life insurance, for example. If it’s a smart version, it could automatically pay the money out when the person dies, based on the digital information we receive from the outside,” Nandra said. “It means the customer doesn’t have to call us to inform us. We don’t have to tell them to get the death certificate and send it to us, and go through this long arduous process.”

But the data source outside the blockchain that proves the life events has to be linked in, Nandra said. “We need to have good lines of communication or links with people that are out there determining that somebody has died. This part needs to be automated,” she said.

Document Exchanges and Data Management Simplified

The most common use of blockchain explored by retirement plans is the exchange of documents, said Satish Venkatesan, with Cognizant Technology Solutions. Venkatesan advises clients on emerging technologies and their impact on the insurance and retirement services areas.

For retirement plans, numerous documents are exchanged and require approvals from various parties, Venkatesan told Bloomberg BNA. Venkatesan cited 401(k) plan enrollment as one example of when blockchain is useful. When an employee’s eligibility to participate in a 401(k) plan needs verification, it’s easier to validate external information about this employee by putting related documents onto the blockchain for those parties to see.

Blockchain offers other advantages in terms of document and data management, according to a report Venkatesan co-authored: its time-stamping feature of can track review time and ensure execution against the most recent versions of documents. In addition, data storage in a blockchain is tamper-proof and cheap because it’s decentralized.

Increased Collaboration

Another opportunity brought by blockchain is increased collaboration between business units, Nandra said. By sharing data across an alliance in a permissioned way on the blockchain, “it allows us to correctly offer customers a range of options, a range of solutions across our alliance, and ultimately leads to better customer experience,” Nandra said.

“The biggest benefit of blockchain lies in the network,” Anindya Sengupta, vice president of strategy at Prudential, said. “If carriers in the network participate jointly and develop a solution that can benefit all the consumers in the network. It’s also a more efficient way to build up and manage a product,” Sengupta told Bloomberg BNA.

Regulators would also benefit from increased collaboration among carriers or providers, Sengupta said. “Right now a lot of the reporting that goes to the regulators is on a snapshot basis. On a blockchain there’s a central source of truth, and regulators would love it from a reconciliation and traceability perspective.”

More Transparency and Security

Blockchain’s decentralizing feature could provide more information transparency when applied in pension funds, Vantroost said. Because terms are defined in the smart contracts for everyone to see, the problem of hidden fees could be eliminated. Participants could also see the plan’s actuarial assumptions, which, if inaccurate, could get plans in trouble, according to the Auctus white paper.

It’s also much harder to commit fraud on a decentralized system, Vantroost said.

“Because if you mess around with the blockchain, it would get detected right away: nodes in the system would send signals there is tampering in the system. Whereas in a centralized system behind closed doors, even if there’s a sophisticated system, you can still manipulate it,” Vantroost said.

To contact the reporter on this story: Jasmine Ye Han in Washington at yhan@bna.com

To contact the editor responsible for this story: Jo-el J. Meyer at jmeyer@bna.com

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

Try Pension & Benefits Daily