Report on ageing world inspires employers to expand and shift their strategic thinking, says Chairman of Mercer

The World Economic Forum has just published Transforming Pensions and Healthcare in a Rapidly Ageing World: Opportunities and Collaboration Strategies with the support of Mercer and the OECD (Organisation for Economic Cooperation and Development). The report and a related Mercer Perspective can be downloaded at www.mercer.com/WEF.

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 labor force, an ageing population and looming health care and pension benefit costs, employers will play a critical role in shaping public policy and addressing these concerns, Mercer believes.

“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 World Economic Forum report, and influenced by Forum insights and analysis, Mercer has published a special Perspective in which the firm’s leading authorities draw upon practical experience consulting in retirement, health care and workforce management – all areas affected by the ageing of the world’s population.

Transforming pensions and health care: Employers as players or spectators?

Governments, Mercer observes, 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 health care 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 maximizing 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 behaviors, 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 auto enrollment 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 automatic enrollment, regular and repeated communications can be used to encourage employees to enroll and save.

Health care strategies for an ageing world – opportunities for the employer

A key concern for employers taking actions to retain older workers is whether this carries health care 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 more healthful diets and increase their exercise, for example, can be a base on 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 health care 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 health care, 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 recognized by many organizations as an indispensible part of being competitive, enabling a company to analyze its future workforce needs against its internal and external labor markets to identify potential shortfalls and to design interventions to fill the gap.

The worldwide impact of ageing societies on labor markets becomes a new factor to be considered in workforce planning. A 2007 United Nations report indicates 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 today to 20 percent. Workforce planning thus 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 organization’s workforce plan.

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,” Ms. Burns observes, “this research provides global leaders with a powerful decision-making framework for evaluating and prioritizing alternative pension and health care 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 health care 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 health care agendas. Mercer intends to continue to work in partnership with many major employers to seek out effective innovation and practical solutions in these areas.”

Reports available from the World Economic Forum and from Mercer

The World Economic Forum report can be downloaded at http://www.weforum.org/pensionshealthcare.

Mercer’s Perspective, which addresses the implications of an ageing global population on pension plan design, defined benefit plans, health care planning and workforce planning that anticipates an ageing workforce, can be downloaded at www.mercer.com/WEF.