An age-old issue

A greying workforce is presenting employers with fresh challenges. Jenny Keefe examines how rejuvenated benefits structures can help

At the age of 67, Sir Alex Ferguson has just lifted his 11th Premier League title as Manchester United manager. And the old dog shows no signs of easing into his slippers yet.

Britain’s workforce is ageing quickly. Ferguson is just one of a growing grey army of people who are working past the state retirement age of 65 for men and 60 for women, with 1.37m people doing so in the first quarter of this year according to the Office for National Statistics. A recent Bupa report projected that over the next 20 years, the age of the average worker will climb from 39 to 43, and predicts the average retirement age will hit 68 by 2050.

Medical advances and falling birth-rate levels mean employees are becoming increasingly long-lived. New laws on age discrimination are not surprisingly facilitating the process.

This occupational longevity throws up opportunities for employers. As Jelf associate director James Biggs says: “Despite legislation in Europe failing to force the issue, many employers now allow staff to work beyond 65. This keeps experienced and often loyal and hard-working employees within the business. We advise employers to use discretion, but wherever possible to retain such employees.”

But nobody is immune from Old Father Time. The Bupa research offers a worrying glimpse of a demographic crisis, where, over the next 20 years, the number of workers with chronic conditions will rise by at least 7 per cent to more than four million. Musculoskeletal disease among employees will rise by 8 per cent, while heart disease will rise by 11 per cent.

This is alarming news for British employers, who could soon be buckling under increased pension, healthcare and group risk costs. “Creating benefit strategies flexible enough to cope with these differing demographics will be one of the employment challenges of the next 20 years,” says Hewitt consultant Colin Bullen.

Group Risk

“Many income protection providers have seen the problem coming, and tailored their offerings accordingly, working with employee assistance programmes (EAPs) and early intervention strategies. Yet the other providers need to play catch up. Products will have to be restructured to allow for cover for employees passing the normal state pension age.”

The average retirement age is already starting to drift upwards. Between April and June 2008, the average retirement age for men who had worked past their 50th birthday was 64.6, according to the Office for National Statistics. This is the highest since records started in 1984, when the average was 63.7.

Those workers nearing pension age have found a fall in share prices translates into a drop in retirement income. The need to boost these funds accounts for the swelling ranks of workers sticking around after age 65, says Paul Avis, corporate development manager at Ceridian, an outsourcing business specialising in human resources. “While age discrimination legislation provides some comfort to employees who wish to work beyond traditional retirement age, the downturn has prevented many who wish to retire from doing so,” says Avis.

The employee-age profile of course influences the number of death and disability claims, which will be reflected in insurance premiums. This could be more of a slow-burner, however. “Clearly, an ageing employee population will have an impact on group risk premiums,” says Steve Herbert, head of benefits strategy at Origen. “But the actual increase in premiums will be relatively modest and gradual, as the population ages, so is unlikely to cause the employer any significant issues.”

Moreover, while scheme members may be ageing, overall rates of morbidity and mortality are improving. Employers are also reaping the benefits of a competitive market, so, while rates will climb over time, there is short-term value to be had.

“The group risk market was quick to react to age legislation,” says Marion Ware, head of marketing at Canada Life. “It offered extensions to their traditional product design to offer extended cover for employees who remained with the employer past the traditional retirement age. Most group life schemes offer an extended cover facility to ensure that they can maintain their existing level of benefits while employed.”

There are still ways to keep a lid on premiums, however. One option is capping payouts. Ware says some clients are asking to impose limits on payouts. “Employers are looking for more flexibility, while controlling costs in this environment, and we have seen growth in our limited payment options under group income protection schemes.”

Pensions

So what does an older workforce mean for occupational pensions? The demographic shift is bad news for what’s left of final salary schemes, according to Steve Herbert, Origen’s head of benefits strategy. “With many final salary schemes in the SME sector now being closed to new entrants, the population of the schemes is by definition ageing, and the cross-subsidy from younger employees is lost. This adds another dynamic to the problems of funding such schemes which employers need to be aware of.” On the up side, most DB schemes close to future contributions at state retirement age, so there are little extra costs for workers over 65.

Defined contribution schemes could grow in popularity, because they give workers longer to store away cash. On top of this, the older someone retires, the better the rate they will receive from their annuity as they will – according to the insurance company’s actuaries – have less time to live.

Defined benefits schemes are less of a worry for employers, says Herbert. “With DC schemes, broadly speaking, the employer has negated the reasonability for the resulting pension, placing the onus squarely on employees’ shoulders.

“However, such an approach can throw business and succession planning into chaos. Employees with adequate pension provision are more likely to retire. In a worst case scenario, an important employee-in-waiting for a senior position may look elsewhere.”

The key thing is helping employees to maximise their pension pots. Dr Ros Altmann, an ex-government adviser who now campaigns on pensioners’ rights, urges employers to educate staff on investment tactics in the run-up to retirement. “Employers need to offer advice to help employees understand their choices. We need better provision for annuity purchase to make sure people get the right annuity as well as a good rate.”

Another solution is flexible retirement. Many employees want a gradual retirement in which they work part-time in the final years of their working lives, with the flexibility to draw on their pension. “There could be new ‘bonus years’,” says Altmann. “This would be a new phase of life that previous generations could not have enjoyed, where people work two or three days a week, and have more money to spend. This keeps the skills of older workers, benefiting both them and the wider economy.”

Healthcare

The effects of a rapidly ageing workforce on healthcare are all to apparent. The healthcare costs for more than half of European companies increased during 2007, according to Mercer’s September 2008 Pan-European Health Benefits Report. An average 5.3 per cent of companies’ payroll costs went on health benefits.

Healthcare costs are only going one way, says Pat Wynne, director of Xafinity. “There is a direct link between rising healthcare costs and increasingly mature insured populations. We see clear evidence that ageing insured populations are more likely to incur high cost claims, such as cancer, heart disease and joint replacement.”

So how can organisations beat soaring costs? “Employers are keen to retain valued healthcare benefits,” says Wynne. “Yet they are mindful of their increasing short and long term financial liabilities.” He says solutions include higher excess charges and capping pay outs for the most costly claim categories.

Hewitt consultant Colin Bullen recommends pre-emptive action. “Private medical insurance (PMI) plans are likely to feel the brunt of the demographic shift. Medical costs typically increase by 3 per cent or more for each year of old age. Alongside increasing lifestyle-related illness, an already excessive medical inflation rate might be pushed even higher.

“Although the purse strings are tight right now, this is precisely the time that companies should be investing in creating a healthy working environment for employees. Companies need to address the impending changes in employee health due to ageing, and if they do not have the work culture to support this, the initiatives will be less effective than they could be.”

Experts agree that this is the right attitude. To cut healthcare costs, employers should focus on preventative measures such as health screenings and employee assistance programmes, rather than immediately targeting coverage of conditions.

Tracking employee health can give early warnings of any problems, says Helen Vaughan-Jones, Bupa’s senior policy research manager. “Employers looking to reduce absence and improve productivity in their organisation can put in place a range of absence-management tools, including absence-reporting services and employee-health surveys. There are also a range of services to help employees manage any illnesses they might have. These might include, for example, an on-site GP or nurse.”

Discrimination

Whether looking at pensions, healthcare or group risk, there is one thing advisers should be wary of: discrimination claims. Employers may be reluctant to pay the significantly increased premiums when as increasing the normal retirement date by an additional five years. Yet this could be the least of their problems. “A bigger concern for us is the attitude taken by employers to age discrimination legislation and retirement dates,” says Origen’s Herbert.

“The reality is that many employers have different approaches on what cover, if any, is offered post the scheme termination ages, and this has the potential to cause mismatches and potential problems in the future for the employer if procedures have not been met.”

Many organisations are coming round to the view that longer working lives may not be such a bad thing. Cranfield University’s April 2008 Recruitment Confidence index showed that employers are well aware of the benefits of attracting older workers, citing more experience and loyalty.

Indeed, several employers are trying out new ways of employing the old. B&Q, for example, famously recruited over-50s to its information desks. It has seen real benefits to its business, including improved attendance rates, lower absenteeism and happy customers pleased with the friendly advice.

“Having a diverse workforce is shown to provide organisations with a competitive edge,” says Avis. “Integrating all members of the team, offering relevant benefits to all and ensuring the business stays on the right side of age discrimination legislation are key challenges. However, the benefits of getting this right can be significant. By employing a diverse workforce, including older people, business can tap into a wealth of experience and skills.”

Government to justify retirement age in the High Court

Employers can currently require workers to retire at 65. In March, the European Court of Justice backed Britain’s compulsory retirement age, in a case brought against the Department for Business, Enterprise and Regulatory Reform by Age Concern.

Yet this is only the latest round in a battle for the right to stay in work beyond 65. The government will now have to justify the default retirement age in the High Court.

To do this, it must justify compulsory retirement as having a legitimate social aim, such as their goals for the labour market or training for younger workers.

“Most people are not old at 60 or 65; many are perfectly capable of working well beyond that,” says Dr Ros Altmann, a pensions and investment expert. “Why should we then throw them on the scrapheap just because they are of a particular age?

“Employers should benefit from employing older workers too, who are reliable, keen and experienced. Best would be to employ people on a part-time basis, so they can gradually cut down which is better for them and keeps them active, and keeps their skills in the labour force too.”