Five reasons your retirement plan isn’t helping your business (and what to do about it)

building a better employee experience

In the current crisis, unleashing the innovation and agility needed to grasp new market opportunities is more important than ever – companies with the best talent have the best chance to thrive. Businesses need to understand how to nurture this talent well into the future.

In the words of May Angelou, “You can’t really know where you are going until you know where you have been.” Just under 20 years ago (between 2001 and 2003), market conditions created the perfect storm for pension plans.

Equity markets slumped while discount rates also fell sharply – plan assets plummeted, and plan liabilities shot up for most retirement plans. This proved the catalyst for a rapid acceleration of the move from defined benefit (DB) to defined contribution (DC). Most companies used the switch from DB to DC to reduce their risk while also reducing the cost of the plans.

This trend from DB to DC continued to accelerate over the years. At last, we had found the solution – DC benefits were the answer! Or, were they?

Even prior to the COVID-19 crisis, the impact of increasing longevity and falling interest rates was felt all too keenly on excepted retirement benefits for those still at work. Now we find ourselves in an unprecedented situation, with many DC fund values taking a significant hit. And despite companies thinking that all of the risk would sit with the employees, many are finding that the fall in DC fund values comes with significant costs to employers as well.

Here’s why – and how to make things better:

1.    The fall in DC fund values is causing financial distress for some of your employees

The massive risk taken by employees in DC schemes was underestimated by many companies and has led to situations where employees literally cannot afford to retire. Shocks such as the recent crisis only perpetuate this, while an increasing number of countries, regulations prohibit a fixed-age mandatory retirement – also adding to costs for underperformers who stay on beyond retirement age.

2.    The same environment is disengaging others

According to Mercer’s Global Talent Trends 2020, 55% of Generation X employees feel opportunities to advance are limited because of employees working beyond retirement age, which leads to a lack of engagement from older and younger workers alike. In addition, 78% of executives are concerned about the unpredictability of individuals leaving the organization. Most employers, however, don’t have programs in place for having open conversations with employees about their career and retirement plans – only 31% offer any support for managers having such conversations with their direct reports.

3.    Your top talent is leaving too soon

Companies’ problems are compounded by the paradox that high-performing employees on average also save more for retirement and are therefore more likely to be able to afford to retire. Given the uncertainty around retirement turnover and the critical skills of many older workers, it’s surprising that two-thirds of companies have no active program to manager workers nearing retirement, and only 41% try to ascertain when critical talent is likely to return.

4.    And companies aren’t providing the flexibility their talent is seeking

Most employers aren’t taking action to help employees stage their retirement – less than half of organizations offer postretirement part-time work arrangements, and 54% aren’t building freelancer retiree talent pools.

Understanding experienced colleagues’ unique motivations for working beyond retirement is critical, especially when 55% of executives are worried about the turnover of older workers. Many high performers feel the need to slow down their pace later in their careers and would be happy to accept lower-stress positions or part-time work with lower rewards to prolong their careers and improve their own health and well-being.

5.    The costs of DC are far more than its contributions

The problem with DB was the cost and the risk to the employer. Companies thought they were paying a set contribution for benefits only to find themselves having to dig deep for extra funds. The benefit of DC plans was that they offered a set contribution, with the employee bearing the risk of lower benefits. What we are now beginning to realize is that companies ultimately bear part of the risk of low retirement benefits- but “contributions are hidden in the impact on the profitability and success of the business.

Companies that manage retirement turnover well actively engage with employees to create the best solution, balancing their needs with the needs of the company. This creates new opportunities and leads to better accountability for both employers and employees in managing career paths and the transition into retirement.

Having the right culture in which these issues can be discussed openly is critical for success. Roles can be adapted to meet the needs of older workers, with the aim of getting the maximum return from their skills and experience while opening up opportunities for the next generation.

DC may indeed still be the answer, but one thing is clear: It’s only part of the solution, and the overall retirement program requires more active management. 

Graham Pearce
by Graham Pearce

Partner, Mercer