On-chain Pensions Taking Over

Dec 3, 2018

Russian Private Pension Funds Suggest Setting Up a System of Individual Pension Capital on the Blockchain

Some of the recent developments in private pension systems that have been springing up extensively all over the world are pretty interesting in terms of practical implementation of on-chain solutions. Here’s a short review of the most recent developments happening in Russia based on this Izvestia article.

On-chain solutions for pension funds are springing up extensively all around the world. The most recent initiative suggested the Russian non-governmental pension fund is supposed to increase the reliability of system of individual pension capital along with the transparency of monetary operations with funds of the Russian citizens, which ultimately boosts the trust of pension beneficiaries.

Russian pension system — just like the majority of others in both strong and emerging economies — is facing multiple concerns. For instance, the non-government pension funds do not warn the beneficiaries of the fact that they risk losing the return on their savings received at some other institution when transferring to another pension fund. Blockchain will eliminate those losses by fixing on the chain each and every money transfer from the beneficiary’s accounts, thus making the data on change available for all the actors. As a result, the whole framework of individual pension capital is to be built on-chain. One of the main problems of the Russian pension market is the loss of investment income by citizens when they choose to transfer from one fund to another. Hence, according to the Central Bank’s data, as a result of the early transition from the Pension Fund to the non-governmental pension fund (or NGPs), 2.85 million people lost 33.9 billion rubles last year. More so, NGPs do not inform clients about potential losses during the transition, and the beneficiaries are misled by agents offering to transfer from their pension fund to some other. Pensions on the blockchain will help to tackle this concern.

Blockchain advocates also suggested organizing the interaction mode with private funds on the basis of this bespoke technology. This has to do with the apprehension that the emergence of individual private capital could potentially enhance the problems of optimization of core business processes in the field, while blockchain allows for the build-up of the platform for reliable, transparent and timely administration of pension accounts, at the same time exercising control over the funds transfer from one private fund to another. Overall, blockchain is seen as the means to pull down error and cost-efficiency of the process.

It’s worth noting that the Russian government has been testing the waters of private pensions systems for quite a while now. The concept of individual private capital is still under development with the basic scenario being that every working individual will be able to allocate from 1 to 6% of their monthly earnings to some private pension fund chosen at their sole discretion. These funds are acknowledged to be the individual’s property and can be inherited, and won’t be added to the common pool to be paid out to other beneficiaries. The system of state pensions will continue to operate as it does now with employers paying insurance contributions for their employees and the State Pension Fund is to make pension remittances to the beneficiaries.

Ultimately, the pension systems prove to be one of the few organic use cases for the blockchain technology as it is bringing to the table an extra level of security making the system difficult to crack as there are a lot of servers involved, each of them storing data on all the transactions. Russian private pension funds have been analyzing the applications of distributed ledger technology to the pension industry and received positive feedback from the largest IT companies as well. Blockchain makes it possible for a beneficiary to move instantly and transparently from one pension fund to another and stores information about acquired pension rights, contributions, investment income in a secure and transparent mode. The nodes (the points where the information is stored) are to be placed at the largest non-governmental funds, as well as at the Pension Fund of Russia, the Central Bank, the Deposit Insurance Agency and the Federal Tax Service, which will significantly simplify reporting and reduce the cost of administering accounts in the system of individual pension capital, according to the officials. More so, there is a prototype of the software product that was recently developed.

Akropolis has been advocating on-chain to be the win-win use case for pensions, and, on a broader scale, for finance at the enterprise level, since there is huge potential to deliver new models and products.

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