Financing Retirement and Health Care as the Population Ages

In a news release, Mercer said it believes that w ith a declining labor force, an aging population , and looming health care and pension benefit costs, employers will play a critical role in shaping public policy .

In a Perspective on the report, Transforming Pensions and Healthcare in a Rapidly Ageing World: Opportunities and Collaboration Strategies , published by WEF in collaboration with Mercer and the Organisation for Economic Cooperation and Development , Mercer said constructive dialogue between governments and employers 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.

E mployers may also play a constructive role by effectively collaborating with financial services firms and health care providers , for example, by m ultinational pooling between countries for life insurance and multi-country management of health arrangements , Mercer said in the news release .

To make defined benefit plans more effective in meeting the demands of an aging population , the most crucial component that needs to be addressed is fund performance relative to liabilities , Mercer contends . A concern is that governing fiduciaries do not have the time or expertise to assess complex investment options. Mercer suggests governing fiduciaries consider delegation to suitably qualified professionals not only with the objective of maximizing returns but also with the goal of avoiding unnecessary risks.

For defined contribution plans, Mercer notes that many plan members do not understand their own objectives and needs and fail to correctly choose, and update, their investment options.

According to the news release, Mercer recommends:

• 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.
• Inenvironments without automatic enrollment, regular and repeated communications can be used to encourage employees to enroll and save.

In the special Perspective , Mercer said a key concern for employers taking actions to retain older workers is whether this carries health care cost consequences.

Initiatives to control health care costs for an aging workforce 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 , Mercer said . Employers should then 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 , Mercer said .

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 ," Mercer said.

Mercer points out that 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. Workforce planning enables 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 WEF report is here .

Mercer's Perspective is here .