Louise Farrand, executive director of the DC Investment Forum (DCIF), explores how blockchain and tokenisation technologies could revolutionise pension scheme investing.
Imagine living in a world where many of the problems levelled at pensions are gone. Pension products and communications are truly tailored to members. People can move their money around quickly. Asset managers and custodians no longer have to carry out time-consuming manual back-office transactions. The barriers to accessing private markets erode.
Blockchain and tokenisation are helping to make that world a reality. These technologies allow assets to talk to each other for the first time. They offer DC pension schemes the opportunity to upgrade their plumbing, creating many new possibilities in the process.
Not a token gesture
It is easy to dismiss these new technologies by putting them into a certain box. Many people assume that they are high-risk, high-concept technologies for digital wizards.
No wonder some people in the audience at a recent DCIF session on tokenisation and blockchain described these technologies as ‘scary’ and ‘risky’.
However, the reality is quite different. These technologies are interconnected ways to represent and record the presence of assets in the digital ether. They are not inherently high risk or low risk; they are agnostic tools that act as enablers, reducing cost and friction and increasing flexibility at scale for pension schemes, the wider industry, and end investors.
Nick Cox of Mobius Life argues that tokenisation is life-changing technology. He believes there will be a J-curve effect, with significant adoption a decade from now.
“Tokenisation offers new ways to address some of the pensions industry’s longstanding challenges, from improving access to illiquid assets and reducing operational complexity, to increasing transparency and enhancing personalisation.”
Louise Farrand, DC Investment Forum
New technology is best understood when we consider its uses. Because those uses are wide-ranging, let’s consider a selection and put them into the context of what they could mean for different parts of the pensions world.
Owning a little bit of everything
Pension schemes have long wrestled with how to hold illiquid assets. Fractionalisation may help. For example, Allan Trimmer, head of alternatives product at Aberdeen, says he has seen asset owners creating tokens of New York real estate, allowing them to fractionalise holdings and sell smaller slices to clients.
The key attraction for him is that it lowers the barrier to access for those assets, which historically have been extremely specialist.
That said, tokenisation is not going to solve the illiquidity conundrum overnight. A large, expensive building can still take a long time to sell, and if you own a token, this will not magically morph into a liquid holding.
Rather, the hope is that, as more smaller tokens representing chunks of assets like buildings become available, it will be easier to sell them as secondary markets develop.
A new big bang?
For the investment world, from custodians to investment managers, tokenisation could make the trading ecosystem much more efficient, both from a cost and an operational perspective.
Over the years, the industry has built a highly sophisticated and effective infrastructure to enable transactions to be completed quickly and at high volumes. However, underneath the surface, there are still many manual interactions taking place.
In some cases, a securities dealer, a custodian, and an investment manager are all generating their own records and then reconciling them back to each other. Blockchain has the potential to remove multiple linkages and inefficiencies within transactions and record-keeping. Smart contracts, which allow deals to be executed automatically when certain contractual standards are met, will also speed up the process. Lower costs are another possible benefit of tokenisation.
Some also believe there will be a hybrid moment when the industry is operating on two tracks, as it goes through an epic migration. One speaker compared it to moving from cheques to mobile banking.
Blockchain and tokenisation will also improve transparency. These systems are often associated with murky waters, untraceable electronic money chains, and tax avoidance. However, in investment markets, the opposite may often be true.
More recently, investors have started to look at private blockchains. In private, or ‘permissioned’, blockchains, access is restricted to approved participants. These networks are often operated by a single organisation or a consortium of organisations, allowing greater control over who can view transactions and participate in the network.
Breaking new ground
The technology offers new ways to address some of the pensions industry’s longstanding challenges, from improving access to illiquid assets and reducing operational complexity, to increasing transparency and enhancing personalisation.
The transition will not happen overnight. As with any major technological shift, there will be costs, regulatory questions and a period where old and new systems operate side by side.
Yet the potential benefits are difficult to ignore. If assets can be represented, exchanged and managed more efficiently, pension schemes may be able to spend less time on administration and more time focusing on member outcomes.
For an industry built around delivering long-term value, that is a compelling prospect. The real question is no longer whether blockchain and tokenisation will influence pensions, but how quickly the sector will adapt to the opportunities they create.
Louise Farrand is executive director of the DC Investment Forum.
