IMF Urges Reforms in Britain's Public Pension System

(August 2, 2011) — The International Monetary Fund (IMF) has stressed that the UK could do more to improve its public pension system.

According to a report by the IMF, the government should make a greater effort to improve the structure of Britain’s public-service pensions while reducing their cost. The IMF added that the higher funding pressures of public schemes are intensified by the fact that the public pension sector is “significantly more generous” than the private pension system.

“Any near-term savings from such reforms (beyond those already budgeted) could fund growth and employment-enhancing measures, thereby making adjustment more ‘growth friendly’,” the IMF added.

Furthermore, the group cautioned that Britain’s growth outlook remains ‘uncertain,’ noting that the combination of low growth and above-target headline inflation poses immense policy challenges.

The report said: “They [the directors] agreed that policies may need to adjust in the event of a change in macroeconomic conditions. In particular, if growth and inflation surprise on the upside, monetary tightening would need to accelerate…Conversely, mounting evidence that weak demand is likely to cause the economy to stall and enter a period of prolonged low growth would call for looser macroeconomic policies.”

Last month, Britain’s Office for Budget Responsibility revealed that the total liabilities for the pensions of teachers, policemen and civil servants totals £1.13 trillion. According to Treasury officials, the rise in pension liabilities is due to increasing life expectancy along with growth in public-sector wages and an increase in the number of employees.

On the other side of the Atlantic, a commission appointed by Arizona Governor Jan Brewer has recommended that the state enroll new employees in 401(k)-type plans rather than in the traditional defined benefit pensions—a step indicative of what some have called an inevitable nationwide trend towards defined contribution plans for public employees. Many American public pension plans face staggering liabilities because of decades of mismanagement, with politicians from both parties making promises to unions without making an effort to pay for them, aiCIO has reported. Even in states like New York, where pensions cannot legally go underfunded, pension liabilities are consuming larger and larger portions of the budget. The 2008 financial crisis exposed the dire situation that many states were in. The public, outraged over stories of lavish pensions when their own wallets were being squeezed, in 2010 elected in several states reformist governors eager to tackle the pension problems.