IMF calls for “caution” on Mansion House reforms

The International Monetary Fund (IMF) has singled out the government’s Mansion House reforms for pension schemes in its latest review of the UK’s finances.

The IMF called for caution with regards to the government’s plans to push pension schemes to invest more in what it calls “productive finance” within the UK.

The plans “should not undermine financial stability or pensioner outcomes”, the IMF said in its concluding statement following its latest visit to the UK.

“For instance, appropriate investment vehicles will need to be set up to facilitate the scaling up of such investments,” the IMF said of productive finance investments. “These vehicles will need to be robustly designed, managed, and supervised.”

The organisation also warned on scheme consolidation plans, as although there is a “clear economic rationale” for doing so, it was likely to “take time and persistent efforts”.

The IMF said the government should pay attention to “possible financial stability implications” of the consolidation proposals. It cited the high volume of bulk annuities, with defined benefit schemes transferring assets and pension liabilities to a small group of insurers, which it indicated created “potential concentration risk” within the insurance sector.

It also urged “continued work to ensure adequate pensions for UK employees”, including the expansion the auto-enrolment system. It specifically mentioned raising the minimum level of contributions, something the government has so far resisted.

Recent reports from Phoenix and WTW have both highlighted the benefits to savers and the economy from raising contributions.

Legislation was passed last year to enable the government to lower the age and earnings limits on auto-enrolment, but this has not yet been enacted.

State pension and growth concerns
Elsewhere in its report, the IMF said the UK should consider linking the state pension solely to the cost of living, scrapping the current “triple lock” arrangement.

However, major political parties have pledged to maintain the lock, which ensures the state pension increases each year by the higher of inflation, wage growth or 2.5%.

“Absent a major boost to potential growth, assuredly stabilising debt in the medium-term will likely involve some tough choices,” the IMF’s report stated. These choices included scrapping the triple lock, increasing road tax and making changes to VAT and inheritance tax.