The Washington-based lending organisation said in a report published this month that pension funds could “give rise to systemic risks [if] pressure to improve returns spur[s] undue risk taking”.
The IMF fears underfunded pension funds could be encouraged to chase returns through riskier investments such as direct credit exposure or by engaging in securities lending in order to improve their funding ratios.
The fund noted that under pressure defined benefit pension schemes still represent half of all US pension funds, and a fifth of multi-employer schemes are underfunded.
The IMF’s comments echoed similar warnings from the OECD in May, when the Paris-based body said pension funds’ move towards riskier asset classes could result in their solvency position being “seriously compromised” in turbulent markets.
Global regulators have previously exempted pension funds from being included in their analysis of what kinds of financial institutions could be considered “too big to fail”.
BlackRock and Vanguard, the world’s two largest fund houses, have both complained to international regulators that pension schemes should be included in any assessment of whether asset managers are systemically risky.
BlackRock said in a letter to the Financial Stability Board in May: “In order to reduce risk, it is necessary to take a holistic approach that encompasses the investment activities of all asset owners and all asset managers.”
John Ralfe, an independent pension consultant, said the IMF was “right to highlight that the existence of DB schemes and how they operate poses a risk to the financial system”.
He added: “A lot of companies in the US and the UK have very large pension liabilities. When those pension schemes own shares in other companies, you [get] a form of double gearing that is great [when markets are on] the way up but not so great on the way down.
“DB pension schemes [will not] create a liquidity problem that could blow up next week, but I think there is an underlying solvency problem.”