Companies are struggling with how to deal with the implications of the increasing longevity of their employees — and what pension benefits to offer them. This is a critical juncture and there is a real need for companies and individuals to consider the "triangle of compromise": contribute more, work longer or receive less.
Currently, if a company has a defined benefit (DB) pension scheme it guarantees the level of pension payments for the rest of a member’s life, meaning that the sponsoring company pays the price of increased life expectancy. This in turn is contributing to the death of DB pensions, which are being replaced by defined contribution (DC) schemes. With DC schemes, members buy annuities when they retire which will provide their regular pension income in retirement. The annuity is still guaranteed to pay out until the member passes away, but the member will pay the price at retirement as insurers offset the increase in life expectancy by offering a smaller amount per year.
However, numerous surveys have demonstrated the limited understanding of pensions among the UK population, and the huge gap between individuals' expectations of retirement income and the often harsh reality. One of the key reasons behind this is longevity. Given this situation, HR professionals must now engage with their organisation's employees to ensure they are fully informed of their pensions benefits and are able to make the appropriate decisions.
According to a recent Aon Hewitt survey that looked at perceptions of retirement savings, 60% of the respondents said they would consider paying more contributions despite the current tough economic conditions. This response at least demonstrates an appreciation of the value of retirement provision.
The survey also revealed that those aged between 18 and 24 have the most unrealistic expectations about how long they will live. On average they imagined that they will live to 82. The reality is that the average person who survives until 65 can expect to go on living into their 90s. Again, this demonstrates the need for HR managers to engage with all employees and, in particular, younger employees entering the workforce who have a limited knowledge of the need for retirement saving.
Higher longevity is a growing burden for the state, employers, and individuals as they ultimately need to find ways of funding a longer retirement. Recent measures taken, such as the increase in the age at which the state pension is paid, have been made in order to manage these costs. The state pension age is expected to increase to age 66 from perhaps 2016 and then will continue to increase to perhaps age 68, although the timetable for this is even less clear. These changes are all trying to deal with the simple fact that people are living longer.
HR managers are in the prime position to advise their staff on the how to deal with this changing situation, the growing issue of longevity – and what it all really means for the individual. Understanding these challenges from the early stages of a career is becoming more and more important if employees are to prepare for a comfortable retirement.
Lynda Whitney is principal at HR consultants Aon Hewitt