The government will need to make "difficult decisions" to rebuild fiscal buffers given the UK's ageing population, the International Monetary Fund (IMF) has said, highlighting the state pension triple lock as one potential area for reform. 

In its latest update on the UK's economy, the IMF suggested that an economic recovery is underway, with growth projected at 1.2 per cent in 2025 before gaining momentum next year.

It also pointed out that the new government has embarked on a "bold agenda" since taking office in July 2024, including major reforms to consolidate pension funds, unlock private investment in domestic capital markets, and promote a more pro-growth approach to financial regulations.

Indeed, the IMF said that whilst pension funds have reduced their risk appetite, the government's plan to consolidate pension funds has the potential to reduce fees and expand access to diverse asset classes.

However, the IMF warned that difficult decisions will likely be needed beyond the medium term to address new expenditure pressures and rebuild fiscal buffers, explaining that the effects of population aging are expected to drive spending higher in the long term, mainly in the areas of health and pensions.

In particular, the IMF said that, unless the authorities revisit their commitment not to increase taxes on “working people,” further spending prioritization will be required to better align the scope of public services with available resources. 

Whilst some steps have already been taken, the IMF emphasised that other avenues for
savings need to be considered.

"In particular, it said that the triple lock could be replaced with a policy of indexing the state pension to the cost of living, as recommended in previous IMF reports.

"Access to public services could also depend more on an individual’s capacity to pay, with charges levied on higher-income users, such as copayments for health services, while shielding the vulnerable," it added. "There may also be scope to expand means testing of benefits."

This comes shortly after the news that the UK government has revived the Pension Commission as part of the next phase of its pension review, alongside the launch of its latest review of the state pension age. 

This, according to the IMF, will consider the balance of all three pillars of the UK system—state, occupational, and personal wealth, as examples of policies that will help mitigate these pressures.

However, the IMF also raised concerns around some of the government's plans, warning that whilst its push for pension consolidation could prove beneficial, it will be important to manage unintended side-effects, such as herding of investment approaches and weaker competitive pressure.

It also warned that mandating asset allocations should be avoided to ensure that pension funds remain able to effectively fulfill their fiduciary responsibilities and achieve the best outcomes for beneficiaries.

Broader potential changes were also raised, as the IMF's update also suggested that The Pensions Regulator’s remit should take into account financial stability considerations, as recommended by the Financial Policy Committee, to strengthen its ability to oversee the evolving pensions landscape and help manage potential risks.

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