This article first appeared on linked in here, Marten’s blogs appear with the kind permission of Maarten. If you would like to see another application of the distributive ledger and Smart contracts in pensions, you can compare the solutions of Keating/Clacher published by longfinance.
I hope those who are close to payroll and pension administration will see the immediate advantages both to processing and to member outcomes of using these ideas.
“Blockchain is a solution to a non-existing problem” is what lots of people say. I beg to differ. Blockchain can simplify cross-industry interactions and make complex processes across multiple companies easy and cheap to manage. Complete industry disruption is possible, as demonstrated in this blog post.
In order to show how the next-generation of blockchain technology, i.e. Solana, can be used to quickly and cost-effectively automate workplace pension contributions, I thought it would be a good idea to create a high-level prototype. You can find it on my Github: https://github.com/mectors/pension-blockchain
An enterprise has 5 employees who each have a pension fund. Each month the enterprise needs to deduct money from their salary and pass it to the pension provider who needs to invest it into funds from different investment managers. This process needs to be done monthly and for lots of pension providers involves uploading spreadsheets with active employees and salary deductions, contributions needing to be reconciled with bank transfers,…
The Blockchain Alternative
In our prototype the enterprise has a bank who converts GBP into GBP tokens and transfers these to the enterprise GBP tokens account. From there the enterprise can distribute the tokens to each employee’s GBP token account. This is equivalent to assigning a pension contribution to each employee.
The moment the GBP tokens arrive into the employee GBP token account, they can be exchanged via the fund manager for fund tokens at a rate of 1 to 2. The fund manager receives the GBP tokens and for each GBP token will transfer 2 fund tokens to the employee’s fund account. The fund manager can take the obtained GBP tokens and exchange them at the bank for GBP.
The employee’s fund token account is protected with multi-signatures, which means that both the employee and the pension provider need to agree, before funds can be removed from the fund token account. This could happen if, the employee retires, transfers their pension fund to another pension provider or changes from one fund to another. Multi-signatures allows for pension providers to avoid employees or fraudsters withdrawing funds unknowingly. Alternatively it can also be used for accounts to be shared with enterprises in order to move money from them into employee pensions.
The Technology Used [Skip if you are not interested]
To create this prototype, Solana was used. Solana is a next-generation blockchain or distributed ledger technology which offers several advantages over competitors:
1) Performance – tens if not hundreds of thousands of transactions are possible per second. This is in contrast with Ethereum and Bitcoin who support less than 20 transactions per second.
2) Low costs – each account requires a small fee to setup [which can be recuperated when the account is removed] in the low tens of dollar cents per account, e.g. $0.015 and each transaction costs in the tenths of a dollar cent, e.g. $0.0015. Gas fees on Ethereum and Bitcoin can cost many tens of dollars per transaction.
3) Speed – each transaction takes a few hundreds of milliseconds, e.g. 0.3 seconds and not many seconds or minutes like other distributed ledgers.
Drawbacks of Solana are that you need to pay for storage which means it is not the ideal solution to store lots of information. Alternative blockchain storage solutions could be used for file storage, e.g. IPFS/Filecoin, Arweave,… or less performant/more expensive blockchains can be used for read mostly data like multi-fund investment strategies, e.g. Binance Smart Chain, Polkadot, Casper [I am an advisor],…
Solana uses Rust and Berkley Packer Filter (BPF) to generate super optimised code. Although both are very powerful, none of these technologies are easy to use and require expert skills. To simplify the prototype, the solana and spl-token command line tools were used via shell scripts, so no programming skills are required to understand the prototype.
In this simple prototype, only one enterprise with five employees with one investment fund offered by one investment fund manager and one bank were created. In real-life many enterprises with different employee sizes, each with their own set of investment funds from different investment fund managers and supported by many banks, would be required. There is no reason why the prototype cannot be extended to cater for this.
Pension fund valuations and buying funds based on market value were not implemented. The Solana eco-system has real-time marketplaces which could be used to do on-chain swapping via decentralised exchanges [DEX] or automated market makers [AMM]. Also transfers to other funds or other pension providers were not implemented at this stage.
A mobile app and (mobile) web interface are needed to provide enterprises and employees with a solution they can use. Stable coins, as prototyped with the GBP token, allow for transfer of funds in sub-seconds. Fiat exchanges in which GBP and other currencies can be exchanged for tokens and back, would need to be added. Also crypto wallets would have to be added to the final solution.
The Blockchain Advantages
This prototype shows that multi-day investments of funds in which employees loose out on days of investment revenues while investment managers and pension providers are busy dealing with moving money from the employee’s company into fund accounts can be a thing of the past. Real-time fund management involving many different players in a complex ecosystem should be possible.
Given the distributed ledger, auditing and valuation can be done in real-time instead of generating an annual report. Customers would always be able to see what the value of their pension is and how it evolved over time.
This prototype is an example of applying the technology to the current way of working. Via smart contracts it would be possible to remove the pension provider and investment fund manager and substitute them for an ecosystem play in which for instance a team of experts votes on which funds to invest in, take action related to compliance changes,… Blockchain can be used to reduce costs but also to remove middlemen. A decentralised pension provider and investment manager would be extremely disruptive to the pension industry but with today’s technology would be able to be launched relatively easily.
If your company or industry would like to understand how blockchain technologies can be applied to either exponentially reduce the current costs or create industry disruption, do not hesitate to contact the author…linkedin.com/in/mectors