IMF warns UK pension costs set to double

THE UK faces a pensions time bomb, with expected increases in life expectancy set to put huge pressure on retirement costs, according to the International Monetary Fund (IMF).

The IMF warned that the ballooning expense, which could double in the next forty years, could threaten the UK’s financial stability.

Between 2010 and 2050, the cost of pension provision is set to rocket, increasing public debt from 76 per cent of GDP to as much as 135 per cent, the IMF has calculated.

It warned that this burden will largely fall on the state due to its guarantees for failed private sector pensions, as well as its responsibility for public and state pensions.

The institution’s calculations are based on just a three year rise in life expectancy over forty years, the period by which forecasters typically underestimate longevity.

“The longevity risk faced by governments adds strain to public balance sheets which have already seriously deteriorated under the stress of the financial crisis…. If not adequately addressed soon, it could potentially further threaten fiscal sustainability,” the IMF warned in its report.

The scale of the financial impact means the government must act urgently to lift the pension age in line with rising longevity, and allow retirement funds to reduce retirees’ benefits to match the income available, the IMF advised. It also suggested new financial products with returns linked to rising longevity.

The IMF’s analysis found that the countries at greatest risk of rising longevity costs are Germany and Japan, but it said that all advanced Western economies face potentially huge gaps in funding for pensions if people live for just three years longer than currently expected by 2050.

“As such, longevity risk potentially adds one-half to the vast costs of aging up to the year 2050,” a sum “totalling tens of trillions of dollars”, it warned.