The World Economic Forum report is a clear call for collaborative action on multiple issues. While employers play particularly important roles in economic and social development, they are by their nature diverse, and their specific reactions to the challenges of the report are likely to vary considerably. However, all employers are likely to agree wholeheartedly that concerted action is needed right now if long-term retirement and health care financing is to be sustainable. 

The financing of long-term benefits presents many very specific challenges for a major business – the timescale alone is longer and more daunting compared with most business planning activities. The area is highly technical, with volumes of localized legislation to challenge the multinational. The issue also touches on some difficult intergenerational challenges even within the current workforces across different countries, let alone the wider social implications for the workforce of the future. The 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. One effect of the recent financial crisis, and possibly its most enduring, is that it has exposed some of the true costs and financial effects of this underlying inevitable aging trend.

Today’s problem

However, the current manifestation of the problem for many 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 immediate scope of this problem is far from easy to deal with, and it may continue to be all-consuming for some employers through the next two- or three year business planning cycles. This underlines the need for actions from stakeholders, and many collaborative responses have already helped, such as funding regulation relaxations. However, in the spirit of the Forum report, it appears that there are still opportunities to explore more innovative financial solutions, flexibility from governments and government action to influence what benefits will look like in the future.

Looking 20 years ahead

The other challenge of the Forum report is to look 20 years ahead. It is difficult to imagine that financing legacy DB plans will remain a crucial business issue. The Forum report, specifically the scenarios in the first stage of the report, anticipates, in contrast to today’s world, a situation in which the fundamental balance of cost and risk might be distributed differently between employers and employees. The Forum scenarios foresee a future in which cost and risk are at least better understood and less subject to erratic shock (in terms of employer liability) than we have recently experienced.

Employer diversity

The scenarios within the first stage of the report demonstrated that a key axis of variation of possible futures was the relationship between greater individual responsibility and greater collective accountability. The business imperatives and history of different employers mean that they may be more innately attuned to a particular place or, indeed, either of the extremes on this dimension. 

Diversity among employers, and especially multinational employers, is significant in relation to the internal social attitude toward benefits. I still recall a conversation of some 30 years ago with the pension benefit director of a major complex conglomerate who had recently been congratulated by the board for rationalizing the company’s benefit programs into one coherent plan. Their comment was that this was the first time within the group that any initiative had involved single group-wide communication. I mention this merely to note how much times have changed. Most large or multinational employers are very sophisticated in identifying and communicating social and cultural values between the enterprise and the workforce.  As in my example, good long-term benefits have very often been a key part of a culture biased toward collective accountability. 

For an employer, understanding its view and position on this dimension is more important than its absolute position or, indeed, 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. The use of the scenarios helps promote such understanding by sketching out what the world would look like if we had either had more individual responsibility or collective accountability. In the area of benefits, it is very clear that over the last 20 or 30 years there have been significant moves away from collective accountability toward individual responsibility and that this has been a key force behind workforce acceptance of the change from DB plans a normal good employer would offer toward seeing defined contribution (DC) plans in the same 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, while at the other extreme others might view their role, at most, as an administration channel.  Either way, the challenge of the report is to consider collaborative strategies and actions. If employers decide against engagement, even as a bystander or spectator, they will need to follow the game closely. Those that wish to influence the outcomes as players, will need deeper involvement. All will need to understand something of the relationship with the other key stakeholders.

Relationship with governments

Governments set the rules within which employers must operate their benefit programs and also create the background environment. Governments control the first pillar of benefits, those provided by the state, 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 in some significant ways. 

A good example is the retirement age for pensions. In response to the demographic trends, virtually all countries have taken steps to increase state pension ages (albeit many deferred into the longer term), which makes it easier for employers to adopt later retirement ages or more flexible retirement arrangements. This works through the calculation of benefits and by complying with rules about the retirement age. But it also works in terms of general expectations about a reasonable age of retirement. 

If a dialogue between governments and employers is based only around an equation about the cost and adequacy of benefits, this may well be confrontational. At the negative end of the spectrum, governments may make contributions for mandatory benefits, while employers may cut back their provision to the minimum, and ultimately, individuals will lose out. However, the Forum report outlines many areas of constructive dialogue that can be pursued without falling into this trap. At a high level, the following options described in the report 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 we see the challenge of the Forum report as extending this collaboration by:

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

Relationship with individuals

Most of the engagement between employers and individuals is with employees or former employees. 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 is regarded to have accrued or already earned. Without underestimating these difficulties, most employers will always want to continue to be seen as “good employers,” which will continue to mean that they meet at least a basic level of individuals’ expectations for benefits. Different generations of employees, however, have very different expectations. Some are age-dependent: For example, one would expect that those born in different decades to become more concerned about retirement as they move into the second half of their careers. But there are strongly established social and behavioral trends that can alter employee expectations. The development of benefit programs must be sensitive to these issues – a good question is “How?”

One of the trends 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. (Please see article entitled “The psychology behind pension plan decisions – Part 1: Enrolment ” which appeared in our Global Retirement Perspective, Issue 3, 2009.) 
 
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 of the mechanisms existing in some countries might be worth pursuing further – say, the engagement of employees or their representatives in the administration and delivery of benefits through fiduciary or other roles. Moves toward more individual self-reliance, however, might lead to more outsourcing of these aspects to providers and a disengagement of employers directly, although employers might be viewed in a more positive light if they were seen to be facilitating the role of individual employees as consumers.

Relationship with providers

Collaboration between major and multinational employers and financial services and health care providers continues to develop. Multinational pooling between countries for life insrance risks is well established, and the multicountry 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 Forum report acknowledges that effective delivery of key financial products and health care services is absolutely crucial to the financial sustainability of benefit provision in these two areas. 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 collaboration to continue to be very real in the sense of joint development projects between employers, consultants and providers to develop innovative ways of meeting the challenges of the future.

Players or spectators?

As a player we will be watching the game closely and will be happy to join with teams that share the objective of making the financing of retirement and health care more sustainable. The Forum report is a working challenge, and in this article, we merely set some of the scenes as background to the relationships that employers have. Looking ahead 20 years, we are convinced that the future will indeed be very different, so keeping in touch with the game will be crucial – the one lesson of history is that history never repeats itself. The Forum report and earlier scenarios are not prescient, but they are the best guide an employer can have.