In a benefits landscape filled with big issues like auto-enrolment, it could be easy to dismiss the impact of the abolition of the default retirement age, believing it to have been addressed two years ago and already ticked off an already burgeoning list. Warns Jeanette Makings, Director of Financial Education Services at Close Brothers.
Whilst the legislation for the abolition of the DRA has now been in effect for a few years, the longer term implications are still being keenly felt and for some employers adapting their people management strategies is still very much a ‘work in progress’ or worse still, some way down the ‘to do’ list.
For certain, there are some urgent and more time pressing fires to put out, auto-enrolment being the biggest on most HR radars. But the changes to the world of retirement are likely to mean a big impact to your P&L, engagement, productivity, benefits structure, resource management and succession, and so it will need attention at some stage soon. In a twist, the more obvious issues of dealing with AE and continuing to battle the economic storm, will have masked or postponed this problem for many employers. The cost and project management of implementing AE for many employers will be large and distracting and the need to rally to ensure implementation for the staging date will be all-consuming and pressing. In addition, in the last few years of contraction, many organisations will have let go those approaching retirement age as part of voluntary exercises, so temporarily hiding this issue.
Many in the UK see the loss of the DRA as a resounding success: reducing areas for discrimination, transferring more responsibility for retirement choices to individual workers, and so giving them more opportunity to improve their financial security for retirement and enabling employers to benefit from experienced workers for longer. Workers have voted with their feet with record numbers now choosing to stay in work beyond pension age. Fuelled by the added effect of the “baby boomers” now reaching retirement, over 12 percent of people now work beyond state pension age, compared to 7.6 percent in the early 1990’s.1 And there are some employers who are struggling to adapt to these changes. In a recent survey3 47 percent of employers would like to see the DRA back in place and 56 percent confirmed that the removal of the DRA has led to an increase in employees staying on beyond normal pension age. Less people are choosing to retire now that the choice lies with the individual rather than with their employer. In difficult economic times and after years of messaging that we need to save more for our retirement, many of those reaching pension age are choosing to carry on earning and delaying their decision to retire. Retirement as a concept is not dead, rather it is being deferred.
Inevitably, it is not all due to the loss of the DRA. There are a number of factors thought to be contributing to this trend including improved health and people living longer but a key influence, especially prevalent in difficult economic times is affordability and the worry of not having enough pension to fund their retirement. This is confirmed in the Ready for Ageing? report2 which concludes that the UK has a worrying under saving problem. It places employers alongside the government and the pensions industry in helping to make it clearer to people what they can expect from their pension as a result of the savings they are making. However, far from making it clearer, the loss of the DRA has moved both organisations and employees towards more uncertainty on issues such as when to retire, how to help staff with these decisions, what changes need to be made to support ageing staff and dealing with resource management. The abolition of the DRA has created a decision point for every employee, leaving them likely to need more guidance now than ever before. And it has shifted the balance of what was once a shared responsibility wholly towards individuals, adding to a lack of centralised control and predictability for employers.
Employers want an engaged, effective workforce, but they also want one they can forecast in terms of their reward spend, pension and benefits accruals, and the size and shape of their staff population. The loss of the DRA and the current economic climate have caused a step change in behaviours and a knock-on effect on the size of a workforce and its cost base. On the plus side, there are more people deferring their pension; but this is just shifting the issue. On the down side there are ongoing reward and benefits costs and, in years to come, the prospect of additional benefits as working practices change to take account of the needs of older workers. And that’s only the half of it. Auto-enrolment and the changes to the state pension age are starting to do the job they were planned for; raising awareness that people need to save more and work longer to provide for financial security in retirement. So whilst the loss of the DRA started a ball rolling, it will pick up speed as working lives are extended and there may be further, potentially more radical changes to look out for on the people horizon. With the average life expectancy4 at 78 for men and 82 for women and that this will rise by 20302 to 88 for men and 91 for women, longer working lives are to be expected and planned for. Some younger people in knowledge of this, may decide to delay starting work or to take a chunk of time mid career, to explore what current generations think of as “traditional retirement” activities like travelling or further education.
So what’s the answer? In simple terms it is to put a review of people management strategies and retirement planning firmly on the HR agenda. Adapt or suffer the longer term consequences. There are strategies that can be used that will work for both employer and individual employees and planning and implementing those strategies is the first step in taking back some control and steadying an area of people management that had previously worked brilliantly for all concerned for many decades. Auto-enrolment is an opportunity to raise the issue of saving for an adequate retirement. It is an opportunity to start the process of making that link between savings and what those savings will need to be used for.
Communication around planning for retirement shouldn’t just happen at retirement, it should be a continuous engagement and should involve all aspects of a reward structure not just a pension. Financial security in retirement is not only about pensions. Pension savings are accumulated from salary, bonuses, and other investments. Savings and investments result from planned budgeting and informed short, medium and long-term savings strategies throughout an individual’s career. However many employees do not have the information, skills or guidance to put such a plan in place and even fewer still could plan for more than a couple of years without some professional advice. More employers are trying to do the right thing by providing support to employees to help them to make informed decisions around pension savings, accessing their pension and planning for the transition that retirement brings. And some are now recognising the value of a financial education programme and the role it can play in helping to meet these needs. A financial education programme is not just about information. It should inform, of course, but it should also demonstrate how all benefits can be used to build a financial plan and the impact of that plan on an individual’s finances throughout their life. It should also help individuals to put that plan into action, as information without a resultant change in behaviour has little lasting benefit.
The extent, content and nature of a financial education programme can be targeted to a specific need or flexed to provide a holistic approach. Whatever the aim, a little can go a long way and providing something is better than nothing. If the most immediate concern is support for retirement, then providing those approaching pension age with support will crystallise decision making, encourage engagement on retirement decisions and smooth the transition for those planning to leave. And there can be bonus effects too. Financial education programmes can help to increase a return on your benefit spend. They unlock the full potential of your benefits package, raise your benefits profile and demonstrate its value to your people. This can lift engagement, help improve financial wellbeing and increase productivity. The retirement landscape is changing, and those at the front of the curve have spotted the changes and are moving their pieces to respond in the best way for their company and for their people. There may be other single bigger issues in the way at the moment like auto-enrolment. But if the changing face of managing retirement is not addressed it will creep up and bite those organisations that are not prepared. Managing this change will be far more preferable than responding to it.
1 www.guardian.co.uk 12/6/12 Office National Statistics
2 The Stationery Office HL Paper 140 14 March 2013
3 Eversheds research of 307 employers April 2013
