The cost of freedom and choice

A rise in transfer requests from defined benefit schemes has intensified the associated administrative uncertainty, while at a corporate level the reforms may complicate workforce management.  

The reforms also challenge much of the current orthodoxy: the idea that it is the member who takes the investment risk is no longer that simple. And the concept whereby the sponsor avoids balance sheet volatility is no longer strictly correct. Yet government policy is to extend, broaden and ease access to the reforms. 

One implication is that there will be less support for the economy should it enter recession, especially relevant at a time of already low interest rates.

But whether the reforms are an anachronism is moot. They continue to add to demand, which is what policymakers seek, even with so-called extraordinary measures, although there are risks and downsides.

In boosting demand, the reforms reinforce some of the worst effects of low interest rates, not least the large current account deficit.

They may also exacerbate the economic fallout in the event of financial instability, and not just from equities; low yields, high associated duration and uncertain market liquidity question further the value of gilts in many default and drawdown funds since the reforms.

High residential property prices provide for another cautionary tale, with survey evidence suggesting many home owners are looking to access their pension pots in order to double up.

Andy Haldane, chief economist at the Bank of England, recently opined that property is likely to be a better saving proposition than pensions (read equities). However, this does not mean property will be a good investment in itself, or that other considerations such as taxation, liquidity and diversification are not important.

Even when the economic backdrop does become stronger, the reforms may lead to higher interest rates that damage the financial health of many people before retirement. And that would add a new twist to the increasingly sensitive question of intergenerational fairness.

Michael Nicolaou is a former pensions manager at Westminster City Council