Supplementary retirement savings plans can provide security and stability for older people who no longer have a steady paycheck — and India's National Pension System (NPS) aims to do just that. NPS is a supplementary Defined Contribution pension plan, and subscription to the scheme is purely voluntary in nature. Like most of the world, India's population is aging, and lifespans are increasing. As a result of improved health and sanitation conditions, the global life expectancy is forecast to increase from an average of 65 years in 1990 to 77 years by 2050.1 For most people, living longer means more non-working years to enjoy. But for growing numbers of people around the world, maintaining enough income to live comfortably during those non-working years is expected to be a challenge. Not only are most older people no longer earning income, but as the years advance, the cost of living and inflation continue to increase. As government leaders around the world consider ways to help citizens prepare for retirement, they can look to India's NPS as a model for boosting retirement savings and helping aging workers avoid poverty during old age. The Basics of India's National Pension System In 2004, the Indian government launched its National Pension System with the goal of providing retirement income to its citizens.2 The system aims to institute pension reform and foster the habit of saving for retirement. Initially, the program was made available for government employees only, but in 2009, NPS became available on a supplementary basis for all Indian citizens between the ages of 18 and 60. A Tier I NPS account (a mandatory account offering tax benefits) is designed in such a way that it discourages early withdrawal until the account owner reaches retirement age. If the account owner intends to withdraw before retirement age, they are allowed to withdraw only 20%, and the balance has to be used to purchase annuity. The NPS offers a decent tax benefit for its participants — contributions are made before taxes — but a portion of withdrawals are subject to taxes. On reaching the retirement age, one can withdraw 60% of accumulations, which are tax free, and the balance of 40% has to be utilized to purchase annuity from approved annuity providers. One can defer the withdrawal and stay invested until the age of 70 or continue to make fresh contributions, if desired. Tier II NPS accounts provide voluntary savings options without stiff exit penalties or lock-ins. There is a proposal to provide some tax benefits under Tier II NPS, which would require a lock-in period of three years; however, this proposal is yet to be confirmed. Since the launch of the system, the Indian government has created additional social security programs to encourage retirement saving, especially among the working poor. In 2010, the government's Swavalamban Scheme committed to depositing 1,000 rupees into the accounts of each saver who contributed 1,000 to 12,000 rupees into their own account annually and was not covered by a government or employer pension. But in 2015, that plan was scrapped in favor of the Atal Pension Yojana (APY), which guarantees defined pension distributions during retirement for savers who meet certain qualifications based on their contributions. APY also offered a government contribution of 50% of the saver's total contribution or 1,000 rupees per year, whichever is lower, for a period of five years (from 2015 to 2020). India's NPS has gone through a few iterations and continues to evolve, but the plan is helping to boost retirement savings among Indian citizens. It's also shifting citizens' expectations: Instead of relying on younger family members to support them in their old age, many are now adjusting their savings and preparing to support themselves in their retirement years. On top of that, NPS is one of the cheapest investment products. Overall costs of the NPS are far lower than those of other products, and it is perhaps the cheapest pension product available. 3 Lessons You Can Learn From India's Model For organizational leaders around the world, India's experiment in providing a national pension program for all its citizens offers a number of valuable lessons. 1. Unsustainable National Debt Requires New Solutions Long before the NPS was launched, India's federal and state government employees were covered by a tax-funded defined benefit pension program that provided a 50% replacement wage at retirement with an inflation-linked adjustment. In the mid-1980s, this program cost the country less than $0.5 billion annually, but by 2006, with people living longer, the price tag jumped to more than $600 billion per year.3 Maintaining the program was unsustainable, and leaders realized they needed to develop a replacement program to ensure successful retirements for future workers and protect the nation's finances. Since the launch of NPS, all new government employees have been enrolled in it, fostering a responsibility among workers to prepare for their own retirement and protecting the government from continuing to run up unsustainable pension debt. 2. Tax Advantages Are Key for Supplementary Retirement Savings Plans Most participants choose to invest in the NPS due to the tax benefits. However, some Indian citizens report that they did not opt for participating in the NPS as they perceived that some mutual fund instruments and private retirement savings vehicles have greater potential to beat the market and also provide better tax benefits. In order to encourage citizens and promote NPS, the government developed three categories of tax-saving options. The third of these options is exclusively for salaried employees whose contributions are made through the corporate model of NPS. All three categories can be availed together and exclusive of each other. Moreover, there was a recent relaxation in the tax-free withdrawal limit of corpus allowed at the time of retirement (from an earlier limit of 40% of corpus to 60% of corpus). Originally, though 60% was allowed to be withdrawn, the balance of 20% was taxed at normal rates, and making it entirely tax free has made it even more attractive. While a few senior executives may have access to other retirement savings plans, including employer-sponsored Defined Contribution superannuation plans, most of the population (particularly among the working class) do not have access to other retirement savings plans, and hence, the tax advantages inherent in NPS are crucial encouragement for them to save for retirement. 3. Citizens Need Education About the Model's Benefits While the NPS offers a number of benefits to savers, participation rates remain relatively low.4 Some respondents to a recent survey revealed that not understanding the importance of saving and the advantages of compounding interest could have influenced their choice to stay out. NPS leaders have used a variety of methods for communicating and educating the population about the system. For instance, pilot programs staged in two different geographic areas hosted workshops, meetings and camps targeting unorganized sector workers and key stakeholders. Information was also distributed through cable television networks, radio, mobile publicity vans, seminars and road shows. India continues to measure the success of its pension program and may make more changes in the future. Many countries are struggling to solve the potential challenge of poverty in old age, but the NPS in India is an encouraging step toward protecting the future for many of its citizens, and it's worth taking a look at the model for inspiration. Sources: 1. United Nations: Department of Economic and Social Affairs,"World Population Prospects — 2017 Revision: Global life expectancy," United Nations: Department of Public Information, June 21, 2017, https://www.un.org/development/desa/publications/graphic/wpp2017-global-life-expectancy./ 2. "National Pension System — Retirement Plan for All," National Portal of India, October 22, 2018, https://www.india.gov.in/spotlight/national-pension-system-retirement-plan-all. 3. Kim, Cheolsu; MacKellar, Landis; Galer, Russel G.; Bhardwaj, Guatam, "Implementing an Inclusive and Equitable Pension Reform," Asian Development Bank and Routledge, 2012, https://www.adb.org/sites/default/files/publication/29796/implementing-pension-reform-india.pdf. 4.Zaidi, Babar, "5 Reasons Why Investors Stay Away From NPS. But Should You?" The Economic Times, December 27, 2018, https://economictimes.indiatimes.com/wealth/invest/5-reasons-why-investors-stay-away-from-nps-but-should-you/articleshow/61890679.cms.
Asian pension systems are facing major challenges. The region is experiencing seismic demographic changes, with rapidly aging populations and declining birthrates. But investment returns are relatively low due to geopolitical uncertainty and minimal interest rates. With the region having relatively few robust retirement systems, many Asian countries will struggle to provide adequate pensions. Governments need to take positive action now to reduce financial pressures and avoid intergenerational conflicts between the young and old. Life expectancy at birth in the region has increased by seven to 14 years in most countries during the last 40 years, according to the 2018 Melbourne Mercer Global Pension Index (MMGPI), which ranks pension systems round the world on adequacy, sustainability and integrity. This is an average of one additional year every four years. The increased life expectancy of a 65-year-old over the last 40 years has ranged from 1.7 years in Indonesia to 8.1 years in Singapore. Much of the rest of the world is facing similar challenges relating to aging populations, and nations are pursuing similar policy reforms. These include raising pension ages, encouraging people to work longer, increasing the funding levels set aside for retirement and reducing the amount of money people can take out of their pension accounts before they reach retirement age. The 2018 MMGPI findings pose the fundamental question: What reforms can Asian governments implement to improve the long-term outcomes of their retirement income systems? The natural starting place to create a world-class pension system is ensuring the right balance between adequacy and sustainability. A system providing generous benefits in the short-term is unlikely to be sustainable, while a system that's sustainable over many years usually provides modest benefits. Without changes to retirement ages and eligibility ages to access social security and private pensions, the pressure on retirement systems will increase, which could threaten the financial security provided to the elderly. Increased workforce participation by women and older workers can improve adequacy and sustainability. Japan, China and South Korea rank near the bottom of the Mercer index. Their pension systems do not represent a sustainable model to support the retirement of current and future generations. If left unchanged, these countries will suffer social conflicts, since pension benefits will not be distributed equally between generations. Japan, for instance, is taking baby steps to reform its pension system by gradually raising the mandatory retirement age of some 3.4 million civil servants to 65 from the current 60 years of age. Japanese retirees can now choose to start receiving their pensions at any point between the ages of 60 and 70, with greater monthly payments offered to those who start at age 65 or older. Having the world's highest life expectancy and lowest birthrate, Japan's population is expected to shrink. This challenging situation is already contributing to skill shortages, which will further impact Japan's shrinking tax revenue base. The Japanese government could improve its pension system by encouraging higher levels of household savings and continuing to increase the level of state pension coverage, since 49 percent of the working age population is not covered by private pension plans. Introducing a requirement that part of the retirement benefit must be taken as an income stream and not a lump sum will improve the overall sustainability of the social security system — as would reducing government debt as a percentage of gross domestic product, as this improves the likelihood that the current level of pension payments can be maintained. China faces different issues. China's unique pension system comprises various plans for urban and rural populations, as well as for rural migrants and public sector workers. The urban and rural systems have a pay-as-you-go basic pension consisting of a pooled account (from employer contributions or government expenditure) and funded individual accounts (from employee contributions). Supplementary plans are also provided by some employers, particularly in urban areas. The Chinese pension system could be improved by increasing the use of workers' contributions to pensions to enhance the overall retirement protection of workers and increasing minimum support for the poorest retirees. A requirement that part of the supplementary retirement benefit must be taken as an income stream should be introduced, as well. More investment options should be offered to pension holders to permit a greater exposure to growth assets, while pension plans should improve their communications with members. Hong Kong should consider introducing tax incentives to encourage voluntary member contributions, thus increasing retirement savings. Hong Kong should also require that part of the retirement benefit be taken as an income stream. Older workers should be retained in the labor market as life expectancies rise. South Korea suffers from one of the weakest pension systems for the poor when expressed as a percentage of the average wage at just six percent. Its system would benefit by improving the level of support provided to the poorest pensioners, introducing a requirement that part of the retirement benefit from private pension arrangements be taken as an income stream and increasing the overall level of contributions. Singapore's well-structured pension system is ranked top in the region and has seen improvements in sustainability. Its retirement system, the Central Provident Fund, provides flexibility to its members, who include all employed Singaporean residents and permanent residents. But more can be done. Barriers to establishing tax-approved group corporate retirement plans should be reduced, and the CPF should also be opened to temporary nonresident workers who comprise more than a third of the labor force. The age that CPF members can access their savings should be raised, as well. Since pension systems are an intergenerational issue, they require a long-term perspective. Pension systems, which are one of the largest institutional investors in any market, should increasingly recognize the importance of acting as good stewards of the capital entrusted to them, including managing risks, such as climate change. With Asia's aging populations staying productive well into their 70s and even 80s, it is critical to improve the provision of adequate and sustainable retirement income. Raising the retirement age, expanding the coverage of private pensions for workers and encouraging financial planning and early savings should be the focus of employers and policy makers. Article originally published in Nikkei Asian Review.
Quality of life is a powerful force. When a generation of citizens experiences unprecedented economic opportunities and long-term financial well-being, there is a strong desire to maintain—or advance—those standards. In China, a surging middle class is determined to enjoy their comfortable lifestyles well into the future. In addition, a younger generation of tech-savvy and financially sophisticated Chinese employees is redefining the meaning of retirement for a population of 1.4 billion people. Trust plays a key role. The Chinese strongly believe in the ability of external financial support sources—such as the government, pensions funds, employers, families, life insurance benefits, and financial advisors—to provide for them in retirement. Younger workers just entering the workforce are placing even greater faith in online tools and financial apps to manage their long-term finances. This trust, however, will be tested as China pivots to accommodate larger global economic forces and powerful cultural developments—such as societal aging—as detailed in the Melbourne Mercer Global Pension Index (MMGPI). The Challenges of Adjusting to Change The MMGPI measures the retirement income systems for nations based on three key sub-indexes: Adequacy, Sustainability and Integrity. A comprehensive analysis of these data sets determines a nation’s overall index rating. For 2018, China received an overall score of 46.2. For perspective, the Netherlands and Denmark received the highest ratings—with scores of 80.3 and 80.2, respectively—and Argentina earned the lowest rating at 39.2. Japan (48.2), Korea (47.3) and India (44.6) all received similar scores to China. Unsurprisingly, these growth economies face domestic and policy challenges that are familiar to China—especially with regard to providing financial support to millions of aging people in an era of declining birthrates. In 1970, the average life expectancy in China was 59 years; today it is 76.5 years. Aging Chinese workers are living longer and causing seismic changes throughout population demographics in China. Increasing life expectancies will test the nation’s pension resources and the financial power of China’s middle class to support the parents and grandparents who worked so hard before them. Currently, China’s retirement income system entails a rural system and an urban system that leverages a pay-as-you-go basic pension. Those pensions consist of pooled accounts (from employer contributions or fiscal expenditures) and funded individual accounts from employee contributions. In some urban areas, employers also provide supplementary benefit plans. These combined resources, however, are not keeping pace with the needs of China’s aging population. Communicating a Diversity of Resources The MMGPI’s analysis of China’s retirement income system reveals that the most impactful path forward entails bolstering existing services, implementing proactive policies and educating employees about the various options and programs that best suit their individual needs. Specifically, the index findings recommend that Chinese policymakers: 1. Continue to increase the coverage of workers already in pension systems. Enhancing coverage allows for a more robust safety net for millions of retired workers, raising the Adequacy quotient. 2. Increase the minimum level of support for the poorest aging individuals. This demographic represents the most vulnerable and highest at-risk group in the aging population, and the one that benefits the most from additional support. 3. Require that part of the supplementary retirement benefit must be taken as an income stream. Installment payments or income annuity payments offer a fixed, effective means of paying the bills—especially when used as part of a diversified retirement income strategy. 4. Increase the age to qualify for a state pension over time. People are living longer, which naturally translates into working longer and retiring later in life. This is key to boosting Sustainability. 5. Allow more investment options to members, thereby offering greater exposure to growth assets. Diversification is the foundation of smart investing. Providing more investment opportunities leads to increased financial stability—especially for China’s middle class, which desires new ways to empower their assets. 6. Improve communications and better educate members regarding the details of pension plans. The accelerated emergence of new investing mechanisms, policies and digital technologies means individuals are often uninformed about the latest opportunities. A Collaborative Quality of Life Successful cultures strive to provide a dignified quality of life to every member of society. This requires the fair and disciplined acquisition and distribution of assets. In modern China, those assets are largely being created by younger workers, particularly in the growing middle class which has experienced a tremendous rise in wages and opportunities. As China’s middle class increases its appetite for new consumers goods, high-quality luxury products and improved standards of living, it must also come to terms with budgeting for the long term—both for themselves and their aging family members. Nearly 43% of Chinese workers expect to be able to enjoy their desired quality of life after retiring by increasing their retirement fund contributions and working side jobs to supplement their savings. This demonstrates that significant segments of the Chinese population acknowledge the pension challenges ahead and are taking informed personal actions to mitigate potential future struggles. This engaged approach to personal financial well-being, supplemented by smart retirement income systems from employers and government organizations can empower Chinese workers—from GenY and Millennials to their aging parents and grandparents—with a synergy of resources that will make quality of life a standard part of getting old. To learn more about retirement income systems in China and the rest of the world, download the full Melbourne Mercer Global Pension Index and visit Mercer China.
There’s no denying it, in the same way fad diets work over the shorter term, simple investment strategies can also provide strong performance when everything works to their advantage. But, over the longer term, the result is likely to be the same for both our physical and financial health – a lack of fuel to power us through retirement. Ongoing investigations of the market for investment consultancy services by the Competition and Markets Authority (CMA) in the UK reinforce this point of view. In a provisional decision report, the CMA stated that they "encourage policymakers to consider how best to address the lower level of engagement by Defined Contributions (DC) schemes in investment matters." But there’s a disconnect between this and the design of DC investment strategies. Changing Relationship Between Employer and Employee Rather than the short term objectives, which drive the focus on current thinking in DC pensions, there needs to be an increased focus on investments, with a long-term time horizon and a disciplined set of core principles. This criteria will provide members with the fuel they need for a financially healthy retirement. Below are three key reasons we believe many investment strategies are lacking the ‘nutrition’ they need for the longer term, and why this needs to change. Deficiency #1: Low Cost = Good Value There’s no doubt that the current regulatory environment has a strong focus on cost, from the charge cap to value for money assessments. Low cost is also a key driver when selecting a provider. But there’s a key difference between cost and value that’s being missed by the market. This race to the bottom is compromising member outcomes. Instead, the focus should switch to value – pushing hard on fees, but not compromising on selecting the best investments when they add value for members. An open architecture structure, with transparency on which funds can be used, can help to manage and improve this selection process. Deficiency #2: A Focus on Cost Means Lack of Diversification Diversification is said to be “the only free lunch in investments,” but we see a number of investment strategies in the market lacking the balanced nutrition to provide members with a healthy pot at retirement. Whilst we’ve had a market environment over the past 10 years that has broadly been favourable for simple, undiversified strategies, the future is uncertain, with political risk across the globe, uncertainty around the impact of climate change, and DC members who are struggling to save enough for retirement. There’s a misconception that focusing on cost means you have to invest only in the traditional asset classes – equities and bonds. Not only does this leave members exposed, it also isn’t true. There are a number of more innovative asset classes that tick the box of being both cost-effective and strong diversifiers – emerging markets, infrastructure and property (on a listed basis) to name a few. On top of this, we believe that set-and-forget long term allocations are leaving money on the table. When you have the right expertise and depth, using a dynamic asset allocation process, adjusting for short to medium term market views, can and does add value by positioning portfolios for all market conditions. Deficiency #3: Members Move Around – Why Should I Care? Members will be invested for upwards of 40 years, but on average members will spend 8.6 years at each employer1. So you can see why employers are reticent to spend time, and money, on designing their investment strategies. But if we all took that view, we’d be failing members. Over the next 20 years, average DC pot sizes are expected to increase by 91 percent2. In addition, assets under management in the DC workplace pension market are expected to increase to c. £1.7trn in 20302. Whilst many members may be relying on other sources of income currently, this isn’t going to be the case in the near future, and the shift from DB to DC pensions means more people will be increasingly reliant on their DC pot to fund their retirement. Most people realise the importance of healthy eating and a balanced diet on their long term health, but often we don’t think they give the same care to investing for retirement. There are a number of reasons and key drivers for this –but these will need to be overcome for us all to have healthy retirements. While investment strategies which fall victim to these deficiencies will falter, and fads will run out of steam, an investment solution based on solid, grounded principles will stand the test of time. Choosing a DC pensions solution that has this at its core is critical. All parties will have a role in this, from members to trustees, pension providers to regulators, and we all need to take action to make sure investments are given the focus they deserve. Download the Investment Nutrition: The Fuel For Retirement report to continue reading what we believe are the key reasons many investment strategies are lacking the nutrition they need for the longer term, and why it’s critical to implement change now. You can also visit UK.mercer.com to learn more. 1 Oecd -https://stats.oecd.org/Index.aspx?DataSetCode=TENURE_AVE 2 FCA - Retirement Outcomes Review.https://www.fca.org.uk/publication/market-studies/retirement-outcomes-review-interim-report.pdf
Businesses operating in much of Asia face a serious aging population challenge that is distinct to the region. While as a whole, Asia Pacific is the fastest aging region globally, there are varying paces of population aging across member countries –with some economies expected to encounter the problem of an older workforce sooner than others. Businesses need to do better at assimilating older workers, especially in sectors like technology, where demographics are skewed towards a younger set of workers. Without the wisdom of older people, every new generation born into the world would have to start from scratch. Children would have to teach themselves to read, to tie their shoes, and open doors. There would be no rules to sports. Cars would turn to rust on cracked highways. Fortunately, older people—parents, teachers, and mentors—provide ensuing generations with the wisdom they need to live, navigate life’s challenges, and find meaning in the world. Older employees offer companies these same benefits, and much more. Though researchers have found that the biology of age tends to negatively affect episodic memory (remembering context) and processing speed (handling complex tasks), researchers have also found that increases in age are associated with better semantic memory (base knowledge) and language and speech skills (discourse). In fact, in general, researchers have found that while ‘fluid intelligence’ (new problem solving, pattern-finding) tends to be lacking in older workers, ‘crystallized intelligence’ (accessing skills from knowledge and experience) tends to be much higher in older workers. Older workers have also been known to have better capacities for emotional regulation, meaning that in stressful or tense workplace situations they are more likely to act calmly and rationally (and therefore cost-effectively) when making difficult decisions.  The Power of Gratitude Aging employees understand that life is temporary, and that good health and a rewarding job should never be taken for granted. Aging employees enjoy higher job satisfaction rates than younger employees. They tend to able to focus and are not consumed by outside distractions and influences. Younger employees, particularly when the economy is strong, often ponder better opportunities elsewhere—jobs with better salaries, better amenities, and better working conditions. Younger workers are more prone to leave jobs and often believe the best way to land a raise is to change companies rather than negotiate with their current manager. Today, it is common for younger employees to depart a job in less than two or three years and move on to the next one. This trend is extremely costly for employers. Older workers in a firm also provide the crucial potential for firm-building and knowledge consolidation. During a vast wave of retirement in the early 2000s as baby boomers left the workforce, many companies struggled with the knowledge gaps created in their absence. Preserving older workers’ intellectual capital is key for culture and knowledge preservation – a crucial attribute in an environment of constant disruption and evolution. Studies also show that older workers are better at nurturing and guiding younger workers, which helps improve business continuity and mitigate knowledge gap problems. We see clear evidence of this trend, especially in the Energy industry. In a recent recruitment campaign across Asia, featuring pictures of older workers using the latest technology, Saudi Aramco went on a hiring spree targeting retired drilling experts to join their newly acquired offshore refinery off the coast of Malaysia. Aging employees also know who they are and what they want from a job and their employers. They are better at negotiating a salary that makes them happy during the interview process, and more astute at knowing which opportunities best fit their skills and sensibilities. Older workers have grown beyond young-adult family and social obligations and offer employers a level of loyalty that can be difficult for younger workers to achieve as they juggle competing priorities. For employers, this sense of stability and happiness has an incredibly valuable impact on the workplace culture. It leads to reduced employee turnover and increased productivity and worker morale. Older employees are the perfect balance to younger employees who are still finding themselves, and where they belong, in the workforce. It is heartening to see an increase in the number of older workers active in the workforce, thanks to the increase in retirement age in many countries. The resulting multigenerational workforce will benefit employers and eventually the overall economic environment, with less dependence on social security. The Continuation of Values Every successful company is built on particular values. Some companies prioritize VIP customer service, the power of new technology, or being environmentally conscious. Over time, we often find companies can lose sight of their mission and values and must revisit their past to find a new direction for the future. Take, for instance, Apple which, in 1997, was operating at a loss. The board decided it had no choice but to rehire co-founder Steve Jobs to kickstart the company toward financial recovery. (Microsoft and Windows 95 had taken over the market.) Steve Jobs’ passion for, and understanding of technological disruption, industry defiance, and sleek-beautiful products returned Apple to its former glory. It also introduced the world to a new succession of streamlined products that dominate our culture today. Aging employees provide companies with a continuity of values. The incessant pressure to innovate and compete often sends companies into misguided directions that can cost millions in wasted capital. Aging employees have had time to internalize the values of a company and can identify when outside pressures are tempting the company into products or behaviors that will ultimately undermine resources and brand equity. Consider this: of the companies that comprised the Fortune 500 in 1955, only 12% were still around in 2016. Sure, the march of time and technology changes the business landscape, but certainly, many of those companies became extinct because they lost sight of their North Star. Older workers, like older family members, can bridge the past and future. Diversity is the New Competitive Edge As companies strive to outmaneuver the competition, they’re discovering the inherent power of a diverse workforce. Not even the latest technologies and business strategies can offer the sheer power of ideas generated by a diverse group of people trying to solve a problem. The more brains with different backgrounds and experiences that are sitting around the table, the greater the opportunity for unique, revolutionary ideas. And no workforce is truly diversified without aging employees. Accomplished business leaders have witnessed the magic that happens when employees from different cultures, races, genders, and ages work together to create something entirely unexpected – something that elevates a brand or company to the forefront of their industry. Aging employees are the cornerstone of a diverse workforce. Whenever a business encounters mistakes or troubled times—and they all do eventually—older workers are there to provide mentorship and perspective. A company’s workforce is a community, and that community needs the grounded insights of employees who have lived through bull markets, recessions, and every type of economic swing and industry shakeup. Also, aging employees simply know more about life than younger employees because they have more experience with it. Whenever a younger employee struggles to balance family and work or navigate other problems that impact the quality of their job performance, older employees are there to offer guidance. This provides a level of value to companies that may not appear in their annual budgets but nevertheless can determine if they succeed, or disappear from the Fortune 500 list. 1 Cognitive Predictor and Age-Based Adverse Impact Among Business Executives, Klein et al. 2015 2 Carstensen, Fung, & Charles, 2003; Charles, Piazza, Luong, & Almeida, 2009
Forced retirement is an outdated idea. It belongs in the past with movie rental stores, screeching dial-up Internet and unwieldy roadmaps that never quite fold back into shape. We live in different times, and workplaces must adapt to generations that are living longer, smarter and more productively. Forcing men and women to retire at a certain age is not only unfair, but shortsighted. Today, people have so much more value to offer businesses, society and themselves long after their mid-sixties. Aging Isn’t What It Used to Be Many workplace cultures and employment guidelines have not kept pace with developments in technology, automation and evolutions in human development. People live and age very differently today than they did not too long ago. For a little perspective, consider the following life expectancy statistics for the year 1965 in the following countries: Now, let’s look at those same countries in 2016: These numbers are staggering. In a mere 51 years, across growth economies and the world, the human race has dramatically increased its collective life expectancy, which is transforming everything about what it means to be a person—including how we work, raise our families and determine exactly what a job means to our lives. For employees 65 years old or older, the future is bright as technology and automation continue to accommodate the needs, skills and talents of aging employees. Automation in an Era of Aging Workforces For decades, traditional employees have followed regimented work schedules that demand they show up to work in the morning and leave later that day, or even that evening. Then, when an employee reaches the age of 65 (or the determined retirement age of their respective country), that regimen suddenly stops, and they are forced into a life of retirement—the logic being that people over a certain age can no longer function at peak capacity; besides, nobody wants to spend the later years in life working. Times have changed. For many professionals, work is not only a job, but a way to connect with others, demonstrate value to society and keep one’s mental and intellectual faculties sharp, engaged and growing. Automation, fortunately, is disrupting the retirement dynamic. Advanced technologies and human capital management software are allowing companies to hire, schedule and pay retired workers in new ways that suit their lifestyles. Many companies are leveraging the value of older workers by employing them in more limited capacities as mentors, teachers and role models to younger employees. Instead of being unwillingly mandated into retirement, older workers can be part of flexible workforces comprised of semi-retired employees. Employers also benefit because they no longer have the binary choice of keeping an aging worker on as a full-time employee or losing them completely to retirement. This allows employers to maintain access to the incredible institutional knowledge and value older workers possess, while also enabling older workers to remain engaged with their professional responsibilities and colleagues. In Conclusion: Automation and the Future of Work Careers are a lifetime investment. For too long, obsolete workplace policies have unfairly severed hardworking professionals from the joys and rewards of their livelihoods. Not only is automation helping to keep aging employees connected to their careers, but it is also opening up opportunities for older workers to prepare younger employees for change. If human life expectancy can evolve so significantly in 51 years—not even a lifetime for most—then those who witnessed that change, and who were part of that lifetime, have the invaluable experience and wisdom that comes with age. Automation will continue to transform the way human beings work, but it will never make knowledge, talent and experience irrelevant. Though the future of work may see fewer repetitive jobs and low-level skills, it will always require the perspective, insights and guidance from those who have come before. In the future, turning 65 years old will be a reason to celebrate one’s career, and not say goodbye to it.
Retirement is changing globally. This is particularly true in Japan, where for decades, lifetime employment at the same employer and a state pension were practically guaranteed. But the 21st century has brought about many changes to the country and lifestyle practices of the people in it. The modern workforce is also evolving as a result. Companies are abandoning lifetime employment due to the heavy burden that such conventions bring. Young people are thinking more strategically about their careers, not just in terms of stability and salary, but also regarding what will help them grow professionally and retire soundly. A recent Mercer study Healthy, Wealthy and Workwise: The New Imperatives for Financial Security, recently looked at attitudes towards financial security and beliefs about retirement. The 12-country study surveyed 7,000 adults across six age groups, as well as 600 senior executives in business and government. In Japan, the study found that financial security is low, and people are more likely to feel stressed about their financial situation than in other countries. It was not just finances that concerned the Japanese. Across all measures – health, wealth and career – confidence in Japan was much lower than in any other country surveyed. This is in large part because the old ways of approaching retirement – which included relying heavily on the concept of lifetime employment and the safety net of state pensions – are in transition. A savings gap triggered by state dependencies Compared to other Asian countries, most notably China, Japan is facing a significant savings gap, especially among people over age 50. But this may be largely due to how retirement was structured. Japanese workers used to have lifetime employment with seniority-based pay, and state pensions were based on these salaries. Now, the Ministry of Health, Labour and Welfare says that the target income replacement ratio of the state pension for a model worker in the private sector is at 50 percent. It is also notable that Japan’s universal health care is quite good. Health is a big spend in post-retirement, and knowing that the state will cover much of your health costs may be one contributing factor as to why the savings rate in Japan is below that of other countries. Both globally and in Japan, people rank health – now and in later years – as the most important factor for a financially secure retirement and a good post-retirement quality of life. However, in Japan, only 12 percent of respondents said they had excellent or very good health as it relates to performance on the job. This was much lower than the global average of 39 percent. Financial pessimism signals opportunity for financial education In Japan, there are moderate, even pessimistic expectations when it comes to financial security and retirement planning. Up until the economic bubble burst in the early 1990s, the traditional trajectory was that someone would join a company right out of college and stay there until the retirement age of 60. The state would then pay pension and health benefits. This was especially true if you worked for a large, multinational company. The average working person did not have to worry too much about retirement. After the bubble burst, many companies struggled financially in the two decades of recession that followed. As a consequence, pension plans were reduced and lifetime employment commitments were cut down. For young people coming out of college, they realized the retirement options of their parents’ generation were no longer an option for them. Even when Japan raised its retirement age to 65, which is lower than most developed countries, they knew relying on the old ways for financial planning was unsustainable. Suddenly, the onus of planning for retirement fell onto the individual. Even though many Japanese people now realize it is their responsibility to save, since this is a new concept, how to do so remains somewhat ambiguous. The financial education and guidance on the matter is minimal. Half (49 percent) of Japanese participants in the study said they need financial security to retire well, and only a quarter (28 percent) felt financially secure now. And less than a quarter (21 percent) expected to maintain a desired quality of life after fully retiring. Most startlingly, only eight percent were confident they had saved enough to provide income for retirement. The research also found that, in Japan, 84 percent of people are willing to make trade-offs – that is, save more or spend less – to afford a longer and better future. Sixteen percent of people, however, would not change anything about their current lifestyle, even if it meant they were unable to maintain their desired quality of life in retirement. This may be because Japanese workers expect to work for a long time, retire later than 65, and are more likely than other nations to feel that they may never retire. Longer lives mean shorter and more modest retirements Today, people in Japan expect to spend 12-17 years in retirement — less than the global average of 15-20 years. These realities require flexibility in benefits as retirement needs and savings vary and affect decisions to continue working or adjust lifestyles. The Healthy, Wealthy and Workwise study found that over half of Japanese adults (53 percent) expect to live past age 80. Seventy-three percent, however, do not ever expect to retire or expect to keep working in some capacity after retirement — among the highest of the 12 countries in the global study. And 26 percent specifically cite continuing in paid work as the key source of their retirement income, albeit the fact that senior workers are increasingly facing challenges to keep their skill-set employable beyond the traditional notion of retirement age. Most expect to live modestly in retirement, relying on a combination of government-provided pension, personal savings and paid work. In Japan, there is a strong focus on family and self as being responsible for ensuring sufficient income in retirement. Although the Japanese do place trust in their employer to provide advice, they are less likely to trust any other people or organization on planning, saving and investing for retirement. Further, individuals are much more likely to be paying into a government-provided pension than into an employer pension plan. In Japan, employer pension plans are much less likely to be seen as a potential income source. Opportunities for change Japan currently has an overlapping approach to retirement: the older generation that is still reasonably expecting lifetime employment and pension systems, and the younger generation that understands they have to save for themselves and approach career planning accordingly. With that in mind, there are opportunities for change at a state level. Perhaps social security should be seen only as a safety net, and not a luxury, and only available to those much older, perhaps in their 80s. When combined with work and a company pension, people would have a better assessment of their financial needs if the structure of retirement planning were updated. As it stands, the younger generation feels they are facing new territory when it comes to savings, often without a lot of resources or education. Globally and in Japan, being healthy, wealthy and work-wise will mean working longer and investing in our health, savings and job skills. To do so, workers need to feel personally empowered through their employers as well as the government, both of whom should explore opportunities for change to match the evolving needs of the modern workforce.
It used to be that workers in China retired around age 50-60, and then lived off pensions and savings. But now that people are healthier and living longer, many plan to work even in retirement, simply because they want to, but more likely due to financial need. This is also true across growth markets, where the expanding middle class is optimistic about the future, but need the tools to make sure they can maintain their quality of life in their later years. The change in retirement is particularly apt in China. Today, people in China expect to spend 20-25 years in retirement — above the global average of 15-20 years. These realities require flexibility in benefits and savings and affect decisions to continue working or adjust lifestyles accordingly. Mercer’s recent study, Healthy, Wealthy and Work-Wise: The New Imperatives for Financial Security, looked at the forces that impact financial security and beliefs about retirement. The 12-country study surveyed adults across six age groups, as well as senior executives in business and government. The results from China offered a glimpse as to how the country views retirement, especially as its middle class grows, urbanization expands, and the nation promotes to delay the retirement age. What Retirement Looks Like: Longevity and Work Three-quarters of Chinese adults expect to live past age 80 and nearly as many -- 70 percent -- expect to maintain their quality of life after retiring. Yet only 43 percent are confident they have saved or invested enough to provide income for retirement. Significantly, 65 percent do not ever expect to retire or expect to keep working in some capacity after retirement. Eighteen percent specifically cite they plan to work in some capacity as a source of their retirement income. People in China are also more likely to see themselves living past age 100 compared to other nations surveyed. For many, the statutory retirement age belongs to a bygone era, since if people live longer, they likely will want to, or have to, do some kind of work after they retire. Retirement Views by Age People in China are working longer, either by choice or from economic necessity. The younger they are, the more they expect to keep working. Seventy-three percent of 18- to 24-year-olds and 71 percent of 25- to 34-year-olds reported that they plan to keep working in retirement. Expectations for the 35 to 44 age group is actually the lowest at 56 percent. However, for those closer to retirement, it rises to 62 percent among both the 45-54 and 55-64 age groups, which was contrary to the global findings at 54 percent. The Chinese view of a good lifestyle in retirement is being able to spend time with loved ones. Forty-three percent -- more so than other nations — expect to be able to maintain their desired quality of life after fully retiring. They are prepared to save more now and take on part-time work to make this happen. Funding Retirement: Government Pensions and Employers People are using a variety of sources to help with retirement planning and spending, and see a key role for government in performing those calculations and ensuring they have enough — more so than in other nations. The Mercer study suggests that the Chinese place a heavy reliance on external sources — such as government, pension funds, employers, family, life insurance and financial advisors — to provide for them in retirement, and trust of all as potential sources of financial advice. At 91 percent, nearly all the respondents invested in a retirement plan of some sort — 50 percent employer, 43 percent government and 35 percent personal — ranking China among the highest in the global study. However, nearly a quarter, 24 percent, had not calculated how much they need for retirement and only 43 percent are confident that they can save enough for retirement. Even though 67 percent trust financial advisors recommended by their employer, it’s notable that only 20 percent have made their calculations with assistance from a financial advisor. People expect to live off their personal savings plus a government-provided pension and are paying into plans accordingly. Having access to employer-driven advice, plans and opportunities is important to Chinese workers. If their employer were to provide access to or improve the overall benefits of the pension plan available to them, the vast majority say it would have a positive effect. Uncertainties About the Future Stress – notably work-related stress – is notoriously high in China, and the idea of health management is getting more attention in the country, beyond basic medical check-ups. It may take employees and companies several years to see the benefits of robust health plans – which could include wellness and mental health offerings -- but with a new generation coming up the ranks in the workforce, it could be key to keeping workers engaged in the organization. Although the global study shows stress is universal, women and younger people felt the most stress. In China, the levels are at parity – 53 percent of all adults are at least somewhat stressed: 54 percent of women and 52 percent of men. Personal health causes the most stress regarding financial security at 56 percent, followed by general economic conditions at 47 percent . Not saving enough for retirement ranks third at 29 percent, among the lowest in the global study, only slightly higher for women at 31 percent and slightly lower for men at 27 percent. Financial stress is highest among the younger groups — 56 percent of 18- to 34-year-olds and 35- to 54-year-olds.It decreases to 38 percent for those over 55. Yet, 83 percent are “mostly certain” they can cover short-term financial emergencies, among the highest globally. In China 86 percent of people are willing to change their current lifestyle, realizing they must make trade-offs to afford to live longer, such as saving more or living a leaner lifestyle. The uncertain bottom line: less than half, 49 percent, of people in China are confident they will be able to afford to live as long as they might. Therefore, living well now and in the future requires better planning and readiness. The Needs of the Next Generation More than any other segment in the survey, 72 percent of millennials in China expect to keep working in later life and, yet, even more, 76 percent, expect to maintain their desired quality of life in retirement. It is evident they need assistance in calculating the income needed for retirement: only 9 percent of Millennials have made the calculations themselves, while 77 percent have done so with help. As digital natives, not surprisingly, they are the most interested in online tools and mobile apps. In fact, nearly all, 99 percent, of 18- to 34-year-olds say online financial tools are of interest and 94 percent are willing to allow online apps to hold personal information — among the highest levels in the global survey. Among adults in China, they also have the highest level of trust (88 percent) in their employers to give good financial advice. Also, employers who offer better savings and investment benefits have a positive impact among 99 percent of 18- to 34-year-olds — the highest globally — resulting in higher job satisfaction as well as greater commitment and loyalty to the organization. Employers play a big role in workers’ lives, beyond just providing a paycheck. They can help people understand – and manage – their finances and help plan for the future. Workers are open to being guided, largely because for many, the tools for retirement didn’t exist before. In an emerging market like China, this is huge opportunity for organizations.
Latin America is a large – and diverse – area of economic growth. Many countries are experiencing renewed economic expansion, while for others; the road remains bumpy amid political fragmentation. According to the International Money Fund, Latin America’s economic recovery is gaining momentum since recessions in countries such as Brazil and Argentina are coming to an end. Private consumption is also up, especially in commodity-producing countries. Mercer’s recent global study, Healthy, Wealthy and Work-Wise: New Imperatives for Financial Security, looked at attitudes towards financial security and beliefs about retirement. The 12-country study surveyed 7,000 adults across six age groups, as well as 600 senior executives in business and government. Globally, more than two-thirds (68%) of adults surveyed expect to keep working in some capacity and never fully retire. The stress of financial security affects all of us — no matter what our age, career stage or occupation — as we each face the prospect of outliving our savings. Societies, employers, and financial intermediaries have much to gain by taking immediate action to address the looming long-term savings gap. As economies mature, emerging middle classes and improving healthcare, mean populations now have to plan for more than just the day-to-day, but for a longer retirement. Globally, two-thirds of respondents expect to live past age 80, and 44% expect to live into their mid-to-late 80s. Although most respondents expect to maintain the same quality of life in retirement, only 30% are confident that their savings, income or pension will be enough. While financial security is a critical need around the world, how Healthy, Wealthy & Work-Wise we are, varies by country. The study found many common denominators among countries globally, as well as some nuanced differences when it comes to financial health and retirement. In Latin America, countries such as Argentina, Brazil, Chile, and Mexico, are particular areas of change, based on demographics and the evolving nature of work. These new dynamics bring both challenges and opportunities. Retirement is shifting in Latin America and around the globe Retirement is not what it used to be. Worldwide, not only are we living longer, healthier lives, but we are also working longer, either by choice or as a result of economic necessity. For many, the traditional retirement age of 60-65 belongs to a bygone era. The Mercer research found that 68% of people globally do not ever expect to retire or expect to keep working in some capacity. Seventy-four percent of 18 to 24 year-olds, and 82% of those aged 65 and older, do not expect to retire fully. The era of retiring confidently, with full pension benefits or sufficient government or social security stipends, is no more. Today, the responsibility of planning for and funding retirement ultimately rests with the individual. Mercer research found that, globally, 81% of respondents felt personally responsible for their retirement income, with 52% taking sole responsibility and 29% saying they have some shared responsibility alongside their governments and employers. Despite the sentiment of personal responsibility, governments and employers still play a large, albeit different role in retirement planning. Complex and changing pension systems complicate retirement Pension systems, globally, cannot be relied on if people want to thrive in retirement. Many people, particularly in Latin America, do not contribute to or pay enough into their retirement to maintain their pre-retirement lifestyles. For instance, in Mexico, the pension system only pays 30% of someone’s last salary, which is one of the lowest according to the OECD. Additionally, many in Mexico say they do not understand the pension system, and in turn, they do not pay into it. There is also the issue of reaching rural populations who work in an informal, cash-only system. In Argentina, a market historically plagued by high inflation, the recent pension law reform raised the retirement age to 70, for both men and women, in an effort to maintain the purchasing power of pensions. The reform also included a change in the rate of adjustment of benefits. From now on, the size of the benefit payment will be revised four times per year (or every three months) instead of twice a year, and will follow the inflation index by 70% and the wage index by 30%. Additionally, 90% of people in Argentina who are retirement age receive a benefit – the majority (nearly 70%) receives the minimum benefit of USD 361. Women who may have the added complication of being in and out of the labor market, due to child bearing, may not qualify for the maximum contribution, which is based on a 41-year time span. Brazil has one of the most benevolent public systems in the entire region. Changes discussed over the last several years, and the country is expected to vote on reform. The expected outcome is based on two pillars: postponing retirement ages and reducing benefits. This will lead individuals to an even greater need to plan for the future, counting on personal and employers´ investments to contribute to their long-term savings. Education is the first step to smart retirement in Latin America Financial security means different things across Latin America. Spending time with family, and even continuing to work in some capacity, is considered a success for many. But planning for retirement starts with education, which is much needed throughout the region. In Argentina, savings motivations are low. Many people live and spend for the day, with little to no regard for future planning. With the government still in flux about how to ensure financial security, educating Argentina’s people now remains a priority. In Brazil, like in Argentina, only a small part of the population understands the mechanisms of savings. This leads to a significant gap between the actions that would help create a solid financial foundation and those executed. Fortunately, the country has seen improvements in this area. Financial institutions, companies, and the government have been encouraging financial education programs. Advice and tools are other components to planning for the future, and an important part of helping people save for retirement. The Mercer research found that, globally, people trust the advice and tools offered to them by their employers for planning and investing. Globally, 86% of employees say that if their employer improved benefits or added access to an investment plan, it would have a positive impact on them at work, resulting in higher job satisfaction and greater commitment to the organization. Workers are looking to employers as a trusted provider of easy-to-use, secure digital tools. And it’s not just the millennials —the largest segment of the workforce – seeking financial tools and guidance. Ninety-three percent of workers under the age of 35 are interested in secure, easy-to-use online financial tools to help manage their finances, and the same is true for 85% of total respondents. Additionally, across all age groups, two-thirds are comfortable managing their savings using mobile banking, online tools or smart apps. In Brazil, for example, the appetite to invest is increasing, and many fintech companies are leveraging this opportunity to encourage people to learn more. The study also found that employers are considered trusted sources for advice and access to improved benefits. Helping people better manage their health, wealth and careers enhances an organization’s value proposition and its ability to attract top talent — all while yielding higher job satisfaction, greater workplace commitment, and less time at work stressing about financial matters. Smaller families signal changes in cultural norms Fertility rates are low across Latin American countries, as they are in many parts of the world. This affects many areas of life, especially how older people live. Multigenerational households used to be a cultural norm in the region, in that older people live with or are taken care of by their children. If a family is smaller, there are not as many options for them. That means that people need to consider what kind of lifestyle they want to live in retirement, and the steps they will need to take to get there. Focus on Chile Chile is one of Latin America’s rising stars due to surging investments and healthy personal consumption. As one of the countries researched in the Healthy, Wealthy and Wise study, its distinct results differentiate the country from many countries around the globe. Chileans expect to be able to afford to ‘live as long as they live’ but are less confident – especially women – that they will be able to maintain their desired quality of life after retiring. Overall, they are more likely than other nations to feel financially insecure and are less confident in their ability to cover unforeseen expenses. Stress about retirement links to general economic conditions in Chile and the type of pension fund(s) they currently invest in – unsurprising as the legitimacy of Chile’s defined contributions pension system is under question, and there have been protests as many schemes are paying out less than anticipated. Chileans are positive in other areas, with two-thirds expecting to live beyond 80 and with intentions to retire before they reach 70. Once retired, expectations of income are relatively high with Chileans more likely to anticipate living off 60% or more of their pre-retirement income. High expectations may be linked to eight in 10 Chileans intending to continue work after retirement and needing this income after retirement as a source of funds. Chileans are also more willing than other nations to save a greater proportion of their disposable income now to make their desired lifestyle happen in future. Additionally, Chilean individuals are more likely to see their overall health, regarding ability to work and earn today, as excellent or very good. This ‘good health’ is achieved by trying to maintain a work-life balance and a reliance on ‘good’ genes. Their definition of a good lifestyle in retirement is spending time with loved ones, being debt free and affording more than just the bare necessities. As expected, given the privately managed pension system in Chile, individuals place the responsibility for retirement income firstly on themselves (70%), but secondly on pension funds or the government. People in Chile are more likely to pay into an employer matching defined contribution plan than other countries within Latin America. As a result, any improvements to access or overall benefits of their available employer pension plan would have a positive impact on Chilean workers, in particular, job satisfaction, a sense that the employer was more caring and less financial stress. Chileans are also more likely than other nations to have used a financial advisor, investment professional or an online retirement savings calculator/tool to help calculate their required retirement savings amount. They are interested in online financial tools and are comfortable with securely storing personal data. Chileans are also more likely to trust their current employer (83%), online financial tools, apps and websites (74%) or personal financial advisors (61%), but not the government (37%) to provide sound advice on financial planning. One of the more surprising learnings from the research is how wide a gap there is between the individual’s expectations of retirement and long-term savings and that of their employers and their governments. The opportunities to ensure financial preparedness across a vast region like Latin America are significant. The region has already experienced meaningful growth, and it is only expected to continue. Ensuring financial security requires collaboration and communication — between employee and employer, business and government, and government and people.
It used to be that workers retired around age 65, and then lived off of pensions, savings and family support. But now that people are healthier and living longer, retiring in their mid-60s is no longer as attractive. Many people plan to work well into their 60s and 70s, not simply because they want to, but more likely due to financial need. Mercer’s recent study, Healthy, Wealthy and Work-Wise: The New Imperatives for Financial Security, looked at the forces that impact financial security and beliefs about retirement. The 12-country study surveyed 7,000 adults across six age groups, as well as 600 senior executives in business and government. More than two-thirds (68%) of the respondents in the study said that they expect to keep working past a traditional retirement age. Today, the way that people work and ‘retire’ has fundamentally changed. Employers and workers need to adapt. This is especially true in growth markets like Asia and Latin America, which are rapidly expanding and the growing middle class are optimistic about the future. However, they need the tools to make sure they can maintain their newfound, higher quality of life in later years. Urbanization As these aging populations face urbanized economies, this will also have an impact on the multi-generations of workers and family structures. For instance, in China, where younger generations traditionally support older generations, and with 60% of the Chinese population expected to be in an urban city by 2030, urbanization will shape the physical and cultural fabrics of this thriving country. Chinese families now face dramatically higher housing, transportation, and food prices, not to mention increasingly limited workforce mobility. Latin America is also one of the world’s most urbanized regions (in comparison, the European Union is 74% urbanized; the East Asia and Pacific region is 50%). By 2050, UN-Habitat predicts Latin America’s cities will include 90% of the region’s population. Latin America, like China, has traditionally had a very family-based culture, so urbanization could also strain family structures and workforce mobility. Time To Retire Retirement Today, on average globally, people expect to spend 15-20 years in retirement. Without better planning, many will either outlive their savings or have to reduce their expected quality of life. These realities will become more acute in many growth economies, where employer sponsored retirement benefits are often immature and government pension systems are threatened by sustainability. The number of working people to retirees will drop dramatically over the next 20 years, globally falling from 1:8 today to 1:4 by 2050. Countries like Chile, China and Brazil will actually halve to 1:2. This puts extraordinary strain on social systems. The strain increases with the high proportion of informal workers in most growth countries. Informal workers can comprise up to 50% of the workforce in some countries. These workers may be unlikely to contribute to or benefit from social security and aged pension systems. In addition to the individual implications, this can also have profound macro-economic implications. The proportion of pension spend relative to GDP is also rising in growth markets. Combined with an aging population, the sustainability of government pension systems is even lower. For instance, Italy, Greece and the Ukraine have among the highest percentages of pension spend at around 16% of GDP, and these were around 10% in 2000, which highlights how rapidly pension spend is growing. Many other European countries have considerably high percentages (>11% of GDP), including Portugal, France, Austria, Slovenia, Spain, and Finland. For context, the U.S. public pension spend is currently 7% of GDP, while Japan and Hungary are 10% of GDP. With societies rapidly aging, organizations will need to be far more flexible in providing programs that meet the needs of a wide range of employees – from millennials who typically switch jobs frequently, to informal workers seeking financial stability, to older workers looking to stay healthy so they can work longer and ensure income in their later years. In 2010, the East Asia and Pacific growth regions accounted for 36% of the global population aged over 65 years. Between 2015 and 2034, the older population in East Asia alone is expected to grow by about 22% every five years. As we navigate aging and urbanized growth markets, employers need to be prepared for a multi-generational workforce. A large part of the workforce is getting older, and they’re not retiring. Further, as more older workers are increasingly likely to live in urban areas, they have less workforce mobility and industry options, not to mention a higher cost of living that will only rise as urban real estate is claimed by the middle and upper classes. This puts a strain on individuals’ abilities to live well for longer. Different expectations around work and retirement on the part of employers and employees could help both groups. Older workers have significant experience that could be extremely valuable —employers that figure out how to keep these employees contributing longer may have a competitive advantage. Opportunities for people to work for an additional decade or two (or three), in different capacities or with adjusted schedules, would mean that people would have many more years where they could contribute to savings and investments. Ideally, a steady savings plan over a longer timeframe could be maintained regardless of how people structure their working lives. It may also provide better retirement outcomes for those who take time out of the workforce, structure their work flexibly or work in the informal economy. On a policy level, it is time to consider raising or even eliminating set retirement ages. Similarly, many countries need to consider providing incentives for people to work past the traditional retirement age. While some growth economies, Singapore for example, have done this successfully, the number of social pension systems that incentivize people to work longer is still small. What individuals can do Around the world, respondents in the survey felt that planning for retirement was their own responsibility, and for the most part, were optimistic about being able to save. China, for instance, ranked highest in their optimism for the future. Seventy-percent expect to maintain their quality of life after fully retiring. This may be due to the quickly growing middle class and traditional savings culture. While this savings may not necessarily be earmarked for retirement, saving for the future is a part of the day-to-day lives of many in the country. On the other hand, Japan, which is the second oldest society in the world, has very low financial security, with 72% of survey respondents saying they do not feel financially secure. Only 21% expect to maintain a desired quality of life after fully retiring and only 8% are confident they have saved enough to provide income for retirement. It is not surprising that 78% of respondents are at least somewhat stressed about their financial situation, with the top factors contributing to this stress being personal health, lack of reliance on a state pension, and not saving enough for retirement. As we face aging societies around the world, not just in Japan, these alarming statistics serve as a warning of the impact a long-term savings gap can have if no action is taken. Although we accept it is our personal responsibility to better prepare for retirement, we are not taking the necessary actions to improve our financial security. Eighty-five percent of survey respondents were willing to change their current lifestyle, realizing trade-offs - such as saving more or downsizing - were necessary to afford to live longer. 40% were willing to save a greater percentage of disposable income, followed by 32% who were willing to spend less and downsize. 27% were willing to take on part-time work. Respondents were looking for greater guidance regarding the trade-offs they should make. What employers can do As later-life financial needs vary, flexibility is vital. People want to choose how long they work. A big role employers play is in rethinking their retirement benefits, especially since workers may want to keep working past the traditional age of retirement. This means, in many cases, employers benefit from the experience and skill sets of older workers — especially in the face of a shrinking talent pool. Employers have much to gain from helping their employees become more financially fit. Research shows that employees who are not financially healthy have higher levels of stress and distraction, leading to lower productivity, poorer customer service and impaired health. As a matter of fact, the Mercer study found that 40% of respondents globally reported their financial security caused them stress. The study also found that 79% of adults trust employers to give sound advice about financial planning. Eighty-six percent of employees said that if their employer improved benefits or added access to an investment plan, it would result in higher job satisfaction and greater commitment to the organization. In short, workers are looking to their employers to help them help themselves. Worrying about money matters at work places a significant drag on productivity — and could be eliminated if employers helped their employees find appropriate financial tools and information to make smarter financial decisions, including long-term savings options. Beyond the practical gains, employers committed to helping their employees attain financial security is simply the right thing to do. These tools would be especially effective for Millennials. They are the least financially secure generation in the workforce today. Ninety-three percent are willing to use online tools to help track and manage their financial, health and personal data as long as the tools are easy-to-use and their data is secure. Eighty-tw percent of millennials surveyed said they would save more if they understood the impact of those savings on later years. Some resources, however, do not hold the same level of interest: 52% of all adults are not comfortable with robo-advisors giving automated advice and feel similarly about call centers with financial advisors. This implies people are looking to be treated individually when it comes to guidance and advice. Employers need to transform savings into an engaging experience and make it achievable through simplified language, tools, and the ability to track savings and progress in real time. This could create the same explosion in the savings industry as we have seen over the past several decades in the fitness industry – aided by the fitness revolution of the 1970s and 1980s, and current digital tools to track, motivate, and improve performance. Act now to live well later Acting now applies to business and government, and is not solely the responsibility of the individual. The need to adapt long-term savings programs and products to new demographic and economic realities is urgent. The current trajectory could put large numbers of people at risk of poverty, not to mention diminished productivity at work. Applying creative and strategic thinking would transform the future reality for many. The dynamics of retirement savings need to change to reflect our diverse and modern social systems and work experiences. Financial security should not be the domain of only those with access to employer programs, of one gender over another, or of older generations to the detriment of those that follow. Public and private enterprises must join forces to ensure that financial security is available to everyone, now. 1 UN Habitat, 2012 2 United Nations Population Data, 2017 3 World Bank, 2017 4 OECD, 2015 5 World Bank, 2015 6 Central Intelligence Agency, 2017
Thanks to the miracles of science and better nutrition, we’re getting older and we’re living longer. Only a few generations ago, the average global life expectancy was 34 years. Today, it is 71 – with roughly half of those born in the Western world expected to live past 100.1 But is this blessing a curse in disguise? While we all might prefer for ourselves and our loved ones to live longer, demographic shifts and new economic realities will place seismic pressures on future generations of our world’s retirees. Simply put, we are at the dawn of an enormous global pension savings gap. Addressing this gap will require drastic changes to the way we live, spend and invest. Faced with the reality of our times, Mercer collaborated with the World Economic Forum to pinpoint possible solutions for this unprecedented global retirement challenge. In a study of eight nations – including China, Japan and India – we discovered a gap between aggregate savings and expected annual retirement income totaling 465 trillion renminbi (RMB) – one and a half times the combined gross domestic product (GDP) of all eight Countries. China had the biggest gap as a multiple of GDP. What’s Driving The Gap? Thanks to its growing middle class, urbanization, falling poverty rates, and improved healthcare, China’s average life expectancy has more than doubled within one generation to reach 76 – five years longer than the global average. By 2050, there will be over 600 million retirees in China. Low birth rates, stemming from China’s one child policy, and a lack of immigration, are adding to the country’s rapidly aging population and plummeting ratio of workers to retirees. That all adds up to a projected seven percent year-over-year growth in China’s long-term savings gap—which is expected to reach US$119 trillion by 2050. But China can close this looming gap. The nation’s almost unprecedented wealth creation over the past decade, combined with a personal savings rate of 38 percent3 (significantly higher than for the US or UK, at 3.5 percent and 5.9 percent, respectively), gives China the means – and more importantly, the right savings behaviours and culture – to avoid this retirement debacle. At the moment, however, most household savings in China are not in preparation for future retirement. Chinese families are more likely accumulating assets like homes and cars, saving for their children’s education, or even preparing to support aging parents! The reason for this contradiction lies in the mistrust many Chinese citizens put in investment vehicles. The population remains largely “unbanked,” with approximately 50 percent of Chinese household savings (excluding property) held in savings deposits with negligible financial returns. Also, government regulations limit access to fruitful overseas investment options that would help Chinese savers diversify their investment risk1 (for example, China has a yearly USD$50,000 cap on exchanging yuan for foreign currency.) Where Are We Now? China’s current retirement income system is divided between urban and a rural social security systems. Both rely on basic, pay-as-you-go pensions consisting of a pooled account (from employer contributions or fiscal expenditure) and funded individual accounts (from employee contributions). Supplementary plans are also provided by some employers, mainly in urban areas, with rural areas largely ignored. Recent findings from the 2017 Mercer Melbourne Global Pension Index make it resoundingly clear that the existing patchwork of China’s long-term savings system is ill-equipped to support its current and future generations into old age. Despite the gravity of the retirement challenge, the government has not yet stepped up its provisions. Pension benefits remain extremely low relative to income. Beijing’s average monthly pension of RMB 3,573, for example, is an inadequate safety net for the growing middle class, representing a replacement ratio of approximately 55 percent of average pre-retirement earnings. In all, China’s total accumulated pension savings balance only represents 13 percent of GDP – exceptionally low by comparison to 140 percent in the US, 209 percent in Denmark, 96 percent in the UK, 30 percent in Japan, and 113 percent in Australia. Bridging The Gap Studies show greater financial knowledge by itself rarely translates into action. What does spur action is giving individuals access to smart tools, default options, tax incentives to save, and guidance that can help them succeed. Individuals, employers, government and financial intermediaries across China all have important roles to play in securing the financial future of the nation. Individuals Must Take Personal Responsibility Changing China’s retirement outlook starts with individuals themselves. For those born in China today, a traditional working life of 40-45 years will not support 52+ years of adulthood. Individuals must take responsibility for their own retirement savings, which in many cases means embracing the reality of having to work longer to achieve their financial goals. The onus is also on individuals to seek out expert assistance and financial intermediaries to plan and manage their savings and investments along the way. Individuals who seek out financial intermediaries to help them “get rich quick” must modify their expectations, and instead seek advisors who will help them become financially secure slowly, but surely. Employers Must Work on Employees’ Behalf For most of the world’s working population, with every paycheck comes a swarm of competing priorities. The world’s most effective pension systems make it easier for people to prioritize immediate versus long-term financial obligations by making saving contributions compulsory or at least incentivized. Given China’s pension system is not compulsory, there are three key actions Chinese employers can take to ensure their employees are exposed to the growth assets needed to build a sufficient level of savings to fund their retirements: increase workers’ pension coverage in both urban and rural, contribute consistently to employees’ pension plans, and offer more growth-oriented investment options. Chinese employers have much to gain by taking these priorities seriously. First, helping their employees attain financial wellness is simply the right thing to do. Beyond that, research shows employees who are not financially healthy have higher levels of stress and distraction, leading to lower productivity, poorer customer service and impaired health. On average, employees spend 13 hours per month worrying about money matters at work – a significant drag on productivity. The Government Must Act At the heart of China’s retirement gap stands the government and the opportunity to modernize outdated practices. The reality is, the state pension age must be increased over time to reduce the ratio of time in retirement to working life. To help individuals mitigate their risk of outliving their savings, the government should introduce a requirement that at least a minimum safety net proportion of supplementary retirement benefits be taken as lifetime annuity income streams. Access to high-quality investment options will play a critical role in helping Chinese citizens achieve financial security, and here government plays a key role. The government should permit overseas investment to provide its citizens with access to growth-oriented investment options. Diversification would permit Chinese citizens to pursue high investment returns at lower risk, rather than being limited to Chinese domestic securities. At the very least, the government should mandate that employers communicate plan options and opportunities to members in order to better employee understanding of their pension. In combination, these actions would narrow the gap directly, while helping individuals and employers play their own respective roles on a more favorable playing field. Financial Intermediaries Must Help Educate China’s rapid economic growth is lifting most of the population out of poverty, especially in urban areas. The purchasing power of China’s middle class is sky rocketing. By 2022, more than 75 percent of China’s urban consumers will earn RMB 60,000 to 229,000 a year. This is equivalent to the average income of Brazil and Italy. How the newly wealthy Chinese population spends or saves its money will be dramatically influenced by the low financial literacy plaguing the country. Without financial direction, short-term expenditures are being prioritized over long-term savings. A “casino” mentality is prevalent across Chinese individual investors. Financial intermediaries have an important role to play in helping individuals set more practical financial priorities. Through long-term-oriented advice, tools and financial products that are high in quality and low in cost, financial intermediaries can break through individual inertia and entice people to save. Partnering with the government and employers, these intermediaries can help China get better at recognizing what “good” financial advice and products look like. Assuring China’s Future The ability of Chinese citizens to consume and spend during their working years and throughout their retirement will have a direct impact on China’s growing economy. If China does not address its long-term savings gap, it risks aggravating a growing wealth divide and sparking unrest that could damage its social fabric. As the ancient Chinese philosopher and writer Lao Tze famously said, “The journey of a thousand miles begins with one step.” Mending China’s pension gap requires immediate and bold action from a number of key stakeholders. It’s time to take the first of many steps. 1 Mercer. (2017). Bold Ideas for Mending the Long-Term Saving Gap. https://www.mercer.com/our-thinking/wealth/bold-ideas-for-mending-the-long-term-savings-gap.html. 2 Human Mortality Database. University of California, Berkeley (USA) and Max Planck Institute for Demographic Research (Germany). www.mortality.org 3 FKPMG. (2016). OECD, National Bureau of Statistics of China.中国养老金发展的战略趋势探讨. 4 “United States Personal Savings Rate 1959-2017 | Data | Chart | Calendar.” United States Personal Savings Rate | 1959-2017 | Data | Chart | Calendar, tradingeconomics.com/united-states/personal-savings. 5 “United Kingdom Household Saving Ratio 1955-2017 | Data | Chart | Calendar.” United Kingdom Household Saving Ratio | 1955-2017 | Data | Chart | Calendar, tradingeconomics.com/united-kingdom/personal-savings.6 FKPMG. (2016). OECD, National Bureau of Statistics of China.中国养老金发展的战略趋势探讨. 6 O’Keeffe, Kate. “China Curbs Hollywood Deals, but Greenlights Tech Investments.” The Wall Street Journal, Dow Jones & Company, 18 Aug. 2017, www.wsj.com/articles/china-issues-guidelines-on-curbing-outbound-investment-1503064455. 7 Mercer. (2017). MELBOURNE MERCER GLOBAL PENSION INDEX 2017. https://www.mercer.com.au/our-thinking/mmgpi.html?utm_medium=social&utm_source=twitter&utm_campaign=mmgpi. 8 Li, Patrick. “Bureau of Statistics: Beijinger Workers Average RMB 6,500 per Month.” PatrickLi, The Beijinger, 17 June 2015, www.thebeijinger.com/blog/2015/06/17/beijing-averages-rmb-6500-month-report-bureau-statistics. 9 Mercer. (2016) Inside Employees’ Minds Financial Wellness. https://www.mercer.com/content/dam/mercer/attachments/global/inside-employees-minds/gl-2017-inside-employees-minds-financial-wellness.pdf. 10 Barton, Dominic, et al. “Mapping China’s Middle Class.” McKinsey & Company, McKinsey & Company, 1 June 2013, www.mckinsey.com/industries/retail/our-insights/mapping-chinas-middle-class.
Societal aging is happening worldwide, but most apparently and rapidly in Asia. Two hundred million people are expected to move into the ranks of the elderly (age 65 or above) between now and 2030 in the Asia Pacific region. This represents a 71% increase compared to increases of 55% in North America and 31% in Europe over the same period. By 2030, Japan will become the world’s first “ultra-aged” nation, with the elderly accounting for more than 28% of the population, while Hong Kong, South Korea and Taiwan will be considered “super-aged” at more than 21%. Conventionally, longevity or societal aging has been associated with health, economic and social welfare problems. Chronic diseases, dementia, poverty and ageism are just some of the issues that come to mind when thinking about old age. Bigger economic implications include a shrinking labor force and pressure on public finances. From a workforce perspective, if the pensionable age remains unchanged, an increasing number of citizens will spend more time retired than they spent working. However, as life expectancy has increased, the health of aging populations has improved and the cognitive and physical capacities of older people have become more durable. Many older people are fit to continue working longer than their parents did. Although the magnitude, complexity and urgency of the problems laid out here should not be underestimated, the real question now may be how governments and businesses could capitalize on this group of mature talent who are still fit for work while enhancing their retirement benefits. What Governments Can Do: Pension Reform and Retirement Policies Some countries are beginning to see shifts in their workforce demographics, whereas others are looking to explore policies that would help businesses embrace older workers. Several countries in East Asia have enacted pension reforms to strengthen the provision of retirement benefits and policies to adapt to their aging populations. China, for example, in 2016 announced its plan to extend the country’s retirement age past 60 for men and 50 for women. Although the details are still to be announced this year and would probably involve a gradual shift, the move shows that China is seriously considering ways to slow a long-term decline in its labor force. In South Korea, the social-security-funded National Pension System implemented in 1988 is now the fourth-largest funded pension system in the world by asset size. The government also plans to ease rules on pension fund management to allow investments into risky assets in defined-contribution-type plans and make it mandatory for all companies to enroll employees in private retirement plans by 2022. As of 2014, only 16% of companies were using private pension plans even though they've been allowed since 2005. With these measures, the South Korean government hopes to increase the number of people enrolled in private pension funds by 44% to 7 million from 4.85 million at the end of 2013 and double the size of privately managed pension funds to ₩170 trillion (US$168 billion) from ₩80 trillion at the end of 2013, all by the end of 2020. The government has also mandated that employers extend the retirement age to 60, effective January 1, 2017. Japan has made similar strides in improving income for senior citizens. The Government Pension Investment Fund in Japan announced the adoption of a new policy asset mix in June 2014, which essentially allowed pension funds to invest a significantly larger percentage of their portfolios into international bonds and stocks while lowering that in domestic bonds and stocks. In 2013, the Japanese government also raised the retirement age from 60 to 61 and plans to increase it incrementally to 65 by 2025. The Employer’s Role in Addressing An Aging Workforce Governments alone cannot do it all. Given that the workforce is a critical mass of the emerging markets’ populations, and people are tending to work longer these days, employers can also play an important role in helping to address an older workforce; for example, with regulations changing rapidly to adapt to aging issues, employers must provide pension benefits that fully comply with the relevant local regulations. In some countries, offering additional or voluntary retirement benefits may be common. Increasing flexibility in retirement scheme design to fit employees’ individual needs may also prove critical to helping older workers transition into retirement; for example, flexibility on retirement age, working patterns and use of voluntary long-term savings as part of the retirement scheme, where regulations permit. HR is at the center of many of these policies, such as flexi-work schedules, job sharing, recruiting older workers and accommodating those with physical or cognitive limitations. As the poet Robert Frost puts it, “The afternoon knows what the morning never suspected.” To harness the wisdom and experience that mature workers have to offer, employers may find it beneficial to create new, purposeful roles for them in the organization. Businesses may also find themselves needing to address the perception that an older workforce excludes younger people. Therefore, rather than narrowly advancing the interests of the older cohort, employers are advised to create frameworks and work with the public sector to implement policies that would enable powerful intergenerational collaboration for the benefit of the organization and all cross-generational employees. The rapid pace of change in retirement systems creates an opportunity for countries in East Asia to think ahead and plan for retirement readiness over the next 50 years and beyond. Many countries are already planning for the future, as witnessed by recent reforms designed to increase coverage of employer-sponsored retirement schemes and the clear move toward defined contribution plans. Careful consideration now could better prepare retirement systems in East Asia to cope with the challenge of an aging population while setting an example for countries in other regions with similar demographics. Actions and solutions need to come from both governments and employers working together. 1 Marsh & McLennan Companies. Advancing into the Golden Years, 2016. 2 The Emerging Markets Symposium. Ageing in Emerging Markets, 2015. 3 OECD. Annual Survey of Large Pension Funds and Public Pension Reserve Funds, 2015, available at www.oecd.org/daf/fin/private-pensions/2015-Large-Pension-Funds-Survey.pdf. 4 Government Pension Investment Fund. Adoption of New Policy Asset Mix, 2014, available at www.gpif.go.jp/en/fund/pdf/adoption_of_new_policy_asset_mix.pdf.