Blockchain May Be The Answer For $48 Billion Lost In UK Pension Pots
25 Feb 2020
Approx Reading time: 5 minutes
- According to R3, identity management systems developed on its blockchain technology could help pension holders keep track of all pension schemes they hold.
- The firm believes a major reason why pension pots get lost is that the identities of pension holders are not digitized.
- However, some experts argue that a centralized database can also resolve this issue, and using blockchain may not be necessary at all.
R3, which is a distributed ledger tech provider, is going to provide the technology needed to develop a new identity solution based on blockchain to pension firms that would aid savers in reclaiming part of the $48 billion that had been lost in pension pots in the UK.
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Abbas Ali, who works at R3 as its head of digital identity unit, pension firms would utilize the technology provided by the company to come up with their own solutions that they would be rolling out this year.
According to estimated figures, over 33 million people in the UK currently have a pension. However, as per a recent study conducted by Profile Pensions, around 24% of the study’s respondents said that there was a high chance they no longer had a track of at least one of their pensions.
The study estimated that the total number of pension pots that may be considered lost around the country is over 1.6 million with an average value per pot of £23,000. This means that the total cumulative value of all pension pots that have been lost can amount to more than £37 billion, all of which is part of unclaimed pension within the UK.
The problem of unclaimed pensions is not local to the UK. In Australia, as per figures reported by the Australian Tax Office, the unclaimed pension pot is worth around $11.3 billion for the year 2017-2018. Back in 2013, it was reported by the Pension Benefit Guaranty Corporation that the unclaimed pension pot in the US had crossed $58 billion.
The core issue that leads to the unclaimed pension pot problem, according to Abbas, pertains to identity. He argues that the exercise of identifying pension recipients and verifying whether they are alive and entitled to pension funds every year is a costly process, which leads to lags and imperfections in the system.
At this time, many pensions providers have to verify identities by mailing documents at the last known residential address of the pension holder, according to Abbas, and some providers also require holders to come in personally to register. Since many people are unable to verify through this manual process, their pensions are at risk of being lost.
Under the blockchain system, users would be able to create their own digital identity, complete with all the information they may require to verify their identity to organizations and the government. This would make it easier for pension holders to manage their pension funds, by shifting from the current system that requires them to create separate profiles for every pension scheme for which they sign up.
The blockchain system at R3 is called Corda, and it has already been utilized to develop systems of identity management by companies like Persistent and Cordentity. It is also being considered for use by government departments, such as in September 2019 when the German government disclosed its plans to launch a project to digitize identities by using blockchain technology.
However, some experts are concerned about the need to use blockchain technology to digitize identities. According to David Birch, who is the director at Consult Hyperion, the value addition made by blockchain technology is not obvious as the same features can be developed on a centralized database.
The only difference with a blockchain-based system, according to Birch, is that the responsibility of updating the system would be on the identity holders, although he believes most people would still prefer if a third-party took ownership of handling their profile identities for them.