The workforce is aging fast, and stakeholders — companies, governments, and others — have a narrow window of time to adapt. So says the World Economic Forum, which Wednesday issued an 80-page report outlining strategic options to address how stakeholders can strengthen financial sustainability, quality of retirement, and health-care provisioning in a rapidly aging world.
The report emphasizes that companies and governments must work cooperatively for meaningful action to occur — a dubious scenario in today’s light, with the two sides rarely in agreement on how health care and retirement should be paid for. For CFOs, however, the concern is whether retirement and health-care funding should be a priority right now.
After all, despite a tone of urgency in the report, it discusses demographic changes in terms of decades, not years. For example, it includes a chart showing that the percentage of gross domestic product devoted to retirement and health care will grow from 7% to 13% — between 2000 and 2050.
Indeed, even John Betts — a partner at consulting firm Mercer, a WEF member that helped create the document — concedes to CFO.com that any corporate actions to address the aging workforce won’t necessarily bear fruit for some time. “There is an issue about hard-nosed CFOs saying, ‘How’s it going to affect my profits next year?’” he says. “Probably the answer at the moment is that, well, it won’t.”
That’s the kind of attitude that must undergo a fundamental shift, the report argues — and not only because of the specter of runaway costs. Just as important, the WEF says, is an opportunity to counter the dour fact that many people will have to work later into life as retirement grows less financially attainable. The challenge will be to turn that reality into something very positive for the bottom line. “There is potential to create a ‘new age of age,’ in which growing old is no longer synonymous with declining health, [but rather] experience is valued as much as youth, the ‘silver economy’ is vibrant, and the ‘wellderly’ are active and valued in society.”
That’s an ambitious goal. But the report, which was two years in the making, has plenty of suggestions for how stakeholder can help facilitate the paradigm shift.
Employers, for example, should put less focus on approaching health care tactically with programs that address health issues as they arise, and begin thinking strategically by promoting healthy behaviors. For example, they should provide practical incentives for employees to engage in physical activity, subsidize healthy eating options in workplace dining facilities and vending machines, and ensure that working practices and environments are conducive to long-term health.
Many employers, of course, have taken steps in those directions, although the report clearly implies that more should be done.
In any case, employers want to know what kind of return such investments will produce. In a Web conference yesterday, Mercer partner Christine Owen claimed that on average, wellness initiatives will produce an eventual return of at least three or four to one; that is, $3 to $4 worth of increased productivity and reduced health-care costs for each dollar spent. The return is even greater in emerging countries, where less-cynical employees with limited access to health care may be more willing to participate in wellness programs, she added.
Owen did not detail how that calculation was made. But she painted a grim picture of a future in which the health issues applicable to an older workforce have been dealt with inadequately. “Failure to address this issue sooner rather than later may mean that the gap [between health-care needs and provisions] becomes just too big to bridge,” she said. “That could have as big an impact on the economy as the current economic crisis — and I can predict for certain that it will last a good deal longer.”
Employers also can improve health care by supporting pay-for-performance programs for health-care providers and building quality measurement into health-plan contracts. They could even investigate the feasibility of extending coverage to include offshore providers, taking into account the risks of legal liability and employee attitudes, the WEF report says.
Into the Sunset
Companies also should step up their efforts on financial education and retirement-planning advice for workers, the report says. They should provide more and better education programs, targeted communications that take into account an individual employee’s level of financial literacy, and access to cost-effective planning advice by selecting advisers or subsidizing the cost.
But while it’s easy to understand how changing health-care behaviors could hit the bottom line, it’s less clear how improved retirement planning would affect corporate performance. Traditionally a good pension plan was a key recruiting tool, but that purpose “is less compelling now than it was,” says Betts.
That’s because as the number of defined-benefit plans shrinks and existing ones increasingly become unavailable to new employees, younger workers’ expectations have changed, he notes. They’re more likely to be satisfied with a defined-contribution plan in which the employer merely matches some portion of their own contributions. That makes using pension plans to recruit new talent more difficult.
But Betts predicts that a new trend, in which a few countries have mandated minimum levels of employer retirement provisions, will spread. “Our feeling is that with the aging trend, you’re going to see governments moving more into that mode,” he says.
That should provide companies with a new incentive to make sure their investments in retirement programs are not wasted. “Calculations show that the outcome of a pension to an employee compared to the money put in can vary by a factor of at least two, depending on how it’s been managed,” says Betts. “Companies won’t want to be hit with the issue of people saying, ‘You gave me this pension and now I can’t afford to retire.’”
To that end, companies should introduce automatic enrollment programs with higher default contribution rates and automatic increases with age, the WEF report says. It also suggests that companies provide more information to employees nearing retirement on reverse mortgages, which allow them to draw down the equity in their home without selling the real estate.
The report also offers ideas for how pension sponsors can improve their plans’ performance. These include introducing target-date funds and appointing professional trustees to plan boards. And they should encourage fiduciaries to investigate the longevity-hedging products currently available for employer-sponsored plans, and facilitate the purchase of annuities by retiring employees.