Transforming Pensions and Health Care Employers as Players or Spectators?

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by John Betts

Financing inherently long-term retirement and health care costs as benefits presents specific challenges for major businesses. The timescale alone is longer and more daunting compared with most business planning activities; the areas are also highly technical, with volumes of localized legislation.

The underlying demographic challenge is clear: Whatever we expected in the past, today more people are becoming dependent in their older years, and those to whom the promise of a retirement income or benefit has been made are living longer. The scale of the issues around aging is staggering: In many countries the elderly proportion of the population is multiplying and the pace of change over the next 20 years is unprecedented. Like reaching a "tipping point," one effect of the recent financial crisis, and possibly its most enduring, will have been to expose the true costs and financial effects of this underlying inevitable aging trend.

The problem currently facing most major employers is the almost overwhelming negative issue of cost and volatility created in legacy defined benefit (DB) pension or post-retirement medical plans. The unexpected scope of this problem will likely continue to be all-consuming through the next two- or three-year business planning cycles. Improvement from here will need actions from all stakeholders, including governments and employers. Many collaborative responses have already helped, such as funding regulation relaxations, but there's more to do.

A challenging report that looks at least 20 years ahead was recently produced by the World Economic Forum in collaboration with Mercer and the Organization for Economic Co-operation and Development (OECD), entitled Transforming Pensions and Healthcare in a Rapidly Ageing World. ¹

The report posed a central question: How can various stakeholders — governments, individuals, employers, financial service providers, and health care providers ¡V strengthen the financial sustainability of, access to, and quality of retirement and health care provision in a rapidly aging world?

The findings were set out in three stages:

• Stage 1: Drivers of change — categorization of factors that will influence the financing of pensions and health care for the key stakeholders.
  
  
• Stage 2: Challenging and plausible scenarios describing the possible futures in 2030.
  
  
• Stage 3: The 11 most effective options or actions, including descriptions of barriers to effectiveness and examples of success.
  
  

The report leaves stakeholders with a challenge to adopt an “opportunity mindset” that sees the effects of aging as positive, through collaboratively considering the actions proposed.

The scenarios in the report ² describe two main variables that may define the future. One is the uncertainty about economic growth – is it high or low? The other characteristic variable is more unexpected: Where will we stand on a cultural scale between greater individual responsibility and greater collective accountability? Employers might also ask themselves the same question about their own current cultural values.

For an employer, understanding its own cultural values will be more important than its reaction to possible changing futures. Clarity and consistency are particularly important to ensure that the firm’s attitude toward benefit provision makes sense to employees. Over the last few decades the significant moves away from collective accountability toward individual responsibility have been reflected in benefits. Indeed, this has been a key force behind workforce acceptance of the change from DB plans (what good employers would have offered) toward seeing defined contribution (DC) plans in a similarly positive light.

The level of engagement of employers working collaboratively with employees will vary. Some employers may wish to be engaged with their workforces in the provision of benefits as a collaborative enterprise; at the other extreme, employers might view their role as an administration channel at most. If employers decide against engagement, and instead become merely bystanders or spectators, they still need to follow the game closely. To successfully influence the outcomes, as players, will require deeper involvement. Where having an effective workforce is crucial to business success, employers will also need to understand the relationship with other key stakeholders.

Governments set the rules within which employers must operate and also create the background environment. Governments control the first pillar of state benefits, which sets a minimum level for the poor or unemployed. However, in both the retirement and health care areas, principles of universal coverage also mean that this first pillar is a level of benefit on top of which a range of employer-sponsored benefits needs to be constructed. This acts to set the scene. For example, the state pension age (albeit now largely subject to long-term increase) does set a standard for employer benefits.

Today's problems might limit any dialogue between governments and employers to an argument only about the cost and adequacy of benefits. On the negative side, governments may make contributions for mandatory benefits only, while employers may cut back their provision to the minimum, and ultimately, individuals lose out. However, many areas of constructive dialogue can be pursued. At a high level, the following options can all be effective win/win scenarios for both governments and employers:

• Promoting work for older people.
  
  
• Providing financial education.
  
  
• Improving the processes for savings.
  
  
• Improving annuities to make the exchange of lump-sum payouts more effective.
  
  

Most countries have established consultation mechanisms with major employers on these types of issues, but this collaboration might be extended by:

• Discovering specific areas for joint action rather than merely consultation;
  
  
• Creating and benchmarking between countries for local best practices;³
  
  
• Encouraging cross-border dialogue about benefits of particular significance to multinational employers; and
  
  
• Understanding how benefits for those employed by the government or public sector bodies can be set with greater sensitivity to the private sector.
  
  

Employers engage with their employees, or former employees, within the context of the employment contract. The contractual terms of this relationship can cause significant difficulties, such as the inability in many jurisdictions to make any amendments to benefits that an employee has already earned. Without underestimating these difficulties, most employers go further than strict contracts: they want to continue to be seen as "good employers" and gain the business benefit of a positive workforce.

One trend has been toward increasing self-reliance, which has led to a greater acceptance of DC plans and prepared the ground for more patient-centered approaches to health care. However, this move toward a more individual or consumer approach to benefits has opened up other vital and interesting areas for understanding and decision-making. For long-term benefits, the behavioral aspects of individual decision-making on financial matters are increasingly relevant to all the choices typically left with plan participants.⁴

It is most important that the collaboration with individual employees as stakeholders continues to develop and is refreshed. For example, if the future were to involve greater collective accountability, then some countries’ mechanisms might be worth pursuing further – say, the engagement of employees in the administration and delivery of benefits through fiduciary or other roles. Continued moves toward more individual self-reliance, however, might lead to more outsourcing of these aspects to providers and a disengagement of employers directly. But employers can still gain reputation if they were seen to be facilitating the role of individual employees as consumers.

Collaboration between major multinational employers and financial services and health care providers continues to develop. Multinational pooling between countries for life insurance risks is well-established, and the multi-country management of health arrangements is growing quickly. These types of developments will continue to mature and become more sophisticated, and they will extend into other areas connected with asset management and risk mitigation as country legislation allows.

The effective delivery of key financial products and health care services is absolutely crucial to the financial sustainability of both. While acknowledging that in many cases financial services and health care providers are themselves major employers, we see no particular barriers to continued dialogue and development of this collaboration – indeed, we would expect joint development projects between employers, consultants, and providers to develop innovative ways of meeting the challenges of the future.

Mercer is a player. We will be watching the game closely and are happy to join with others who share the objective of making the financing of pensions and health care more sustainable. Looking ahead 20 years, we are convinced that the future will be very different – so keeping in touch with the game will be crucial. Being a spectator may not prove viable for a business wishing to be successful and needing an engaged workforce to get there.

Employers as players will adapt their benefit strategies. For retirement, they will move away from worrying about the cost of providing an amount at a specific age towards thinking about how to support employees through a period of retirement and then into an older retired period. For health care, the focus will be on an engaged strategy for assisting employees to a healthy life, not just providing access to treatments.