The impact of the ageing population on the nation’s workforce is accelerating. The increase in older workers is helping the UK tackle its rising dependency ratio and it skills shortage, expanding the economy and helping pay for the Government’s soaring health, care and pensions bill. Encouraging people to stay in work for longer is in the interests of employers, and society at large. But what risks and challenges does this bring? And how can advisers help clients to future-proof benefits?
The hard facts
Those aged 50–64 now outnumber those aged 25-34. The number of active 16- to 17-year-olds has nearly halved. The number of active 65+ has more than doubled1.
Added to this, social care costs are going through the roof, whilst government funding continues to fall. Informal care for the elderly is on the rise and, with it, an ever-increasing number of people providing care for both elderly relatives and children: the so-called sandwich generation.
Half the UK’s 6.5 million carers are juggling paid work alongside caring, according to Care UK2. The charity also found that one in six carers leaves work or reduces their hours to care
The State Pension Age (SPA) is increasing over the next decade and will be linked to life expectancy when it reaches 67 in 2028.
According to a report by Mercer3“The UK is sailing an unprecedented labour shortage” due to a combination of factors: a shrinking UK workforce; a post-Brexit fall in immigration; and skills transformation activated by automation, digital and innovation.
In short, the report asserts that we’re not going to have enough people to fill jobs. In order to tackle this, Mercer suggests, amongst other things, retaining older workers.
All the major employee benefit consultancies are making it quite clear that hanging on to good people, ensuring career progression and skills sharing – people strategy – is now key to commercial success, hence the rise of conversations around ‘Human Capital Analytics’ and ‘Employee Value Proposition’.
Aon principal Catherine Stait says: “Aon’s recent benefits and trends survey4found that after communications, employee retention has replaced recruitment as employers’ highest priority.”
Risks & challenges
Encouraging the over 50s to stay in work for longer comes with significant challenges, the biggest being failing health, not to mention diminishing energy levels and the difficulties associated with keeping up with the latest technology.
Poorer health leads to more long-term absences and, hence, more claims on group income protection and healthcare cover. With advancing age, the type of absence typically swings from stress and mental health issues to more chronic complaints, such as those associated with cancer and stroke, says marketing director Paul Avis. “Prevention and intervention can help with this,” he adds.
“By preventing the type of absence that doesn’t need to become long-term, such as workplace stress, the employer saves on the associated costs and can afford to invest in a benefit design that protects both themselves and their most important asset – their people.”
Even without poorer health, the very fact that workforce demographics tip towards the older end will increase benefit spend to employers, obviously in terms of pension provision, but also for life, income protection (IP) and medical insurance cover.
“Ensuring that schemes are open to new entrants will spread the risk pricing where there is a more even split of ages throughout the workforce,” says Aviva customer propositions manager for group protection Julian Nurse. “If this is not possible, the flexibility of group risk products allows other options on benefits and duration of cover, which can help control the costs. Some cover is always better than no cover at all.”
Tait adds that maintaining meaningful levels of cover in times of rising costs needs to be actively monitored “and at the very least managed through effective broking activity as insurer attitudes to the changing risk profile develop and these can differ significantly.
“Perhaps equally important for a sustainable strategy, regular data and claims analytics will also ensure key areas of risk are known and quantified, with activity and spend targeted in those areas most requiring focus to improve future performance and mitigate costs.”
Group risk exemption
From a group risk perspective, the industry secured an exemption when the default retirement age was removed in October 2011 so that an employee’s entitlement to benefits can end when they reach an age of ‘the greater of 65 or State Pension Age’. This was introduced to counteract the potential for a group IP claimant to have to paid until they died as the contract of employment could not be ceased without going through a formal capability dismissal.
Ellipse chief marketing officer Chris Morgan says that the key decision for employers is whether they want to cover all employees or just those who have yet to reach SPA. “Once this decision is made, they must ensure their policy is set up correctly to reflect that,” he adds. “We still see many policies providing cover to 65, or even lower, hence they risk an uninsured liability as the state pension age rises.”
Stait adds that employers need to benchmark the stance, with regards to the exemption, against the demographic of their workforce and legal advice. “In particular, whilst income protection is predominantly offered in tandem with State Pension Age, life cover is often provided beyond, up to age 75, which in time will only serve to drive up pricing as the average age of the demographic shifts.”
Don’t be short-sighted
Avis believes that too many employers are exposed to the risks that come from an ageing workforce and benefit designs that focus on short-term cost savings, not long-term protection.
The percentage of limited pay policies with a maximum five-year benefit has increased from 16.8 per cent in 2013 to 21.9 per cent in 2017, according to Swiss Re’s latest Group Watch5report. In contrast, ‘to retirement’ policies have fallen from 70.1 per cent in 2013 to 62.1 per cent today.
Five-year payment periods might be used to expand the reach of an existing policy to the whole workforce. “I understand and appreciate why limited pay periods might be used in this way,” says Avis. “But does this protect the employer from the increased risks of an ageing workforce? No, it does the complete opposite and we will pay the price for this short-termism if we don’t start to reverse the trend.”
Instead, experts suggest working with insurers to better structure policies and drive improved outcomes through targeted use of early interventions and rehabilitation benefits and services.
“It is critical that employers fully engage with their group IP provider, in order to optimise the value from the solution they have in place,” says Zurich Corporate Risk head of market management Nick Homer. “This is the most effective way to mitigate costs, fulfill duty of care responsibilities and develop a positive workplace culture.”
How to future-proof workplace protection benefits
- Ensure group risk ages align to the greater of age 65 or State Pension Age
- Review scheme eligibility criteria: consider extending cover to all employees, not just pension scheme members
- Structure the scheme so that new employees can be covered on a different basis to existing ones for percentage of earnings and payment term
- Partner with group risk providers that can support complex absence
- Ensure the provider’s early intervention services, typically delivered at no extra cost with group income protection, can provide relevant support to an ageing workforce (i.e. second medical opinion services, personalised care pathways, eldercare support services).
- Tailor benefit communications according to demographic groups.
- Help your clients monitor and manage the benefits programme, using data and claims analytics, to ensure ongoing relevance to the workforce population.
- Leave your clients exposed to potential future uninsured liabilities by failing to advise changes where fixed cease ages on benefits of 65 or less still apply.
- Assume that limited payment and other budget variants of group income protection are always the answer to keeping costs to a minimum.