UK faces ‘£800bn pensions bombshell by 2050’

Britain could face a £800 billion pensions shock by 2050 as a result of its ageing population, the International Monetary Fund (IMF) has warned.

Analysis from the Bretton Woods institution suggests that world economies could be underestimating future longevity growth by up to three years in age.

The result is a potential retirement cost bombshell equivalent to around half of current gross domestic product (GDP) for most developed countries, the IMF said. For the UK the additional bill could be as much as 59 per cent of 2010’s gross domestic product (GDP), the international body added.

As such the cost could run into hundreds of billions of pounds for future governments. Furthermore, the IMF points out, taxpayers are likely to foot the bill of a population living longer than expected.

“With the private sector ill-prepared for even the expected effects of ageing, it is not unreasonable to suppose that the financial burden of the unexpected increase in longevity will ultimately fall on the public sector,” it noted.

The findings comes in pre-published chapter from the IMF’s Global Financial Stability Report.

In its summery, the authors state that the elderly will “consume a growing share of resources” in the years ahead.

But the cost of providing for retirees could be bumped up considerably if people live three years longer than expected, in line with past underestimates.

To offset the additional costs, countries would need extra resources equivalent to 1-2 per cent of GDP every year to 2050, the report suggests. But if the longevity shock occurred today, countries would have to set aside a sum of around half of their 2010 GDP to pay the extra cost over the next 40 years.

“Longevity risk potentially adds one-half to the vast costs of ageing up to the year 2050,” the IMF suggests.

After Japan and Germany, the UK is most exposed to the potential threat. The IMF estimates that pension costs could rise by 44-59 per cent of GDP if the population lives three years longer than expected.

The IMF warns that most governments have not come to terms with the risk of escalating pension costs.

It notes that longevity shocks are “not fully recognised in most long-term fiscal plans”.

As such, the IMF recommends that governments act now to offset the additional costs and develop a “credible and realistic plan to deal with longevity risk”.

Part of this would be an automatic link between life expectancy and state pension age. This would avoid “recurring public debate about the issue”.

The IMF also suggests that increased taxation would help plug the shortfall.