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OECD calls for U.K. to tweak retirement benefits, maintain close ties with EU

The U.K. must maintain close ties with the European Union and implement policies to boost productivity in the aftermath of the decision to leave the union, and should consider changes to state retirement benefits, warns the Organization for Economic Cooperation and Development.

In its latest economic survey of the U.K., the OECD said the U.K. economy has weakened following the decision to leave the EU, made in June 2016. The report highlighted growing uncertainties and risks, including a hit on purchasing power from higher inflation, declining savings rates and a fall in net migration.

Considerations include the potential for a tax and spending review to identify additional fiscal initiatives, including retirement reforms. The OECD suggested a change to the so-called triple lock — where state pension benefits rise by the higher of inflation rates, the rate of increase in average earnings or 2.5%. Indexing these benefits to average earnings "would be fairer, while it would still allow pensioners to benefit from improvements in living standards," said the OECD. "The replacement rate for state pensions is one of the lowest in the OECD, although some pensioners have significant assets in occupational pensions and/or in housing. Therefore, while state pensions should be indexed to average earnings, pensioners with no or low assets should benefit from flanking policies to head off poverty risks."

The survey, which was presented in London by Angel Gurria, the OECD secretary-general, and Philip Hammond, the U.K. chancellor of the exchequer, also identified priority areas for future action, including productivity-enhancing fiscal initiatives and policy reforms to help boost the economic performance of lagging parts of the country.

Sustained economic progress for the U.K. will hinge on a successful outcome to negotiations with the EU and further with other countries. The OECD said monetary stimulus in the U.K. has left room for greater use of productivity-enhancing investment initiatives, and the government should identify these initiatives in advance "to allow their swift deployment … if the low-growth trap persists," said the OECD.

The OECD survey is available on its website.