London – The ratio of elderly persons to the working-age population will dramatically increase in coming years in many parts of the world. With a declining labour force, an ageing population and looming healthcare and pension benefit costs, employers will play a critical role in shaping public policy and addressing these concerns, Mercer believes.
 
With the support of Mercer and the OECD (Organisation for Economic Cooperation and Development), the World Economic Forum (WEF) has just published ‘Transforming Pensions and Healthcare in a Rapidly Ageing World: Opportunities and Collaboration Strategies’.
 
“This report inspires employers and policymakers to expand and shift their strategic thinking,” said M. Michele Burns, Chairman and Chief Executive Officer of Mercer. “The report makes a compelling case for immediate and collaborative action by the private and public sectors. Even more impressive, the analysis sets out a pragmatic blueprint for transformation, by identifying the most promising strategies and providing key scenarios of the future against which to consider the effectiveness of each. The key strategies range from the now existing, but underappreciated, to new and highly innovative options that merit serious consideration.”
 
In conjunction with the WEF report, and influenced by WEF insights and analysis, Mercer has published a special ‘Perspective’ in which the firm’s leading authorities draw upon practical experience consulting in retirement, healthcare and workforce management – areas each affected by the ageing of the world’s population. The Perspective and WEF report can be downloaded at www.mercer.com/WEF.
 
Transforming pensions and healthcare: Employers as players or spectators?
Governments set the rules within which employers must operate and also create the background environment. If a dialogue between governments and employers is based only around an equation about the cost and adequacy of benefits, this may well become confrontational. Alternatively, constructive dialogue may create win/win scenarios if employers, encouraged by or in concert with governments, take initiatives such as promoting work for older people, providing financial education, improving the processes for savings or improving annuities to make the exchange of lump-sum payouts more effective.
 
Similarly, employers may play a constructive role by effectively collaborating with financial services firms and healthcare providers. Multinational pooling between countries for life insurance and multi-country management of health arrangements are examples of such collaboration. As country legislation allows, these types of developments will become more sophisticated and will extend into other areas of asset management and risk mitigation, Mercer believes.
 
Making pension plans more effective
While benefits for individuals approaching retirement may remain unchanged, the level of prospective benefits is being cut for the current and future workforce. There also continues to be movement by both governments and the private sector to shift risk to pension plan participants. Mercer’s Perspective examines ways to make both defined contribution and defined benefit plans more effective to meet the demands of an ageing world.
 
In defined benefit plans, the most crucial component that needs to be addressed is fund performance relative to liabilities. The timeframes for decision making are shrinking at the same time that strategic investment decisions have become more complex. The risk is that governing fiduciaries do not have the time or expertise to assess complex investment options. For many plan sponsors, governing fiduciaries should consider delegation to suitably qualified professionals not only with the objective of maximising returns but also with the goal of avoiding unnecessary risks.
 
In defined contribution plans, Mercer observes that far too few plan members understand their own objectives and needs, and many fail to correctly choose and update their investment options. Participants appear challenged by their own unconscious behaviours, abilities, apathy and inertia. Mercer offers a number of recommendations. The simpler and fewer decisions that plan participants need to make, the better. Contributions should be affordable to encourage lower-paid employees to consider joining defined contribution plans, as low contributions are better than no contributions.

Where automatic enrolment is in place or required by regulation, contributions could be set at higher levels and automatic increases should be considered. Default investment options should provide a reasonable chance of achieving the targeted investment return. And in work environments without auto-enrolment, regular and repeated communications can be used to encourage employees to enrol and save.

Healthcare strategies for an ageing world – opportunities for the employer    
A key concern for employers taking actions to retain older workers is whether this carries healthcare cost consequences. Research does demonstrate that the problems of disability and absenteeism are indeed greater with age; however, in the oldest age groups the chances of disability among those still working declines.
 
Initiatives are likely to be more successful where the design of the job, in terms of working arrangements, environment, nature of activity and training, are considered alongside the health issues. It then becomes important for employers to help employees use health care services more effectively. Mercer notes that efforts to give more responsibility to the individual employee to save money will be more successful if coupled with initiatives such as coaching. Providing practical incentives to enable employees to adopt healthier diets and increase their exercise, for example, can be a base upon which more innovative wellness initiatives can be built.
 
Among other trends identified by Mercer is a return by some employers to onsite or online health facilities to control health care costs and improve workforce productivity. Such facilities may offer the opportunity to better manage chronic illnesses, to expand health and productivity programs and to manage workplace injuries.
 
Employers are also in a potentially strong position to improve healthcare supplier incentives. In practice, says Mercer, employers may find this area to be the most important and also one of the fastest to change in the coming years. Pay-for-performance programs, coupled with developing preferred provider networks and empowering employees to be smart shoppers for healthcare, adds up to a powerful force for constructive change.
 
Workforce strategies that anticipate an ageing workforce
A critical element of business success is ensuring that a company has the right number of employees with the right skills in the right place to execute the business strategy. Without the appropriate workforce, a company cannot compete. Workforce planning is recognised by many organisations as an indispensible part of being competitive, enabling a company to analyse its future workforce needs against its internal and external labour markets to identify potential shortfalls and to design interventions to fill the gap.
 
The worldwide impact of ageing societies on labour markets becomes a new factor to be considered in workforce planning. A 2007 United Nations report indicated that by 2050 the number of people aged 60 and older in developed countries will have increased from 21 percent today to 32 percent, and in the less-developed countries from 8 percent to 20 percent. Workforce planning therefore needs to address the key long-term demographic issue of ageing by promoting work for older employees, a strategy that should be a key element of any organisation’s workforce plan.
 
To illustrate, currently in the UK, the number of retired people is around 25 percent of people of working age, meaning there are about four people to support each person in retirement. However, according to WEF research data, the number of retirees will increase to around 40 percent by 2050, reducing the number of workers to support each retiree from four to 2.5.

Morevoer, many European countries will be in a much worse position than the UK: by 2050 Italy and Spain will have a ratio of around 60 percent—fewer than two workers per retiree—with this proportion of elderly being a huge economic burden, especially if people are not able to support themselves financially with decent pensions in retirement. Data forJapan implies just over one worker to support each retiree in future, illustrating the severity of the problem and the consequence that people will need to have longer working lives.
 
Opportunities and collaborative strategies arise from addressing the issue
“At a time when recovery from the recent economic turmoil places pressure on already stretched resources,” Burns observes, “this research provides global leaders with a powerful decision-making framework for evaluating and prioritising alternative pension and healthcare financing strategies. Employers, providers and governments will need to collaborate in new ways to meet the challenge identified by this research. In particular, the massive challenge we face of financing pensions and healthcare during the unprecedented ageing of societies requires collaborative intervention at earlier stages in life and not only near or at retirement age.
 
"This research is a clear call for strategic thinking by global leaders reviewing their pension and healthcare agendas. Mercer intends to continue to work in partnership with many major employers to seek out effective innovation and practical solutions in these areas."
 
Mercer / Expatica