Two sides of the same coin?
According to the recent DWP document Fuller Working Lives, older employees are set to form an increasing part of the UK’s working age population. Employees aged between 50 and state pension age currently represent 26% of the working age population. That figure rockets over the next few years, with the same report estimating that the over 50’s will represent 32% of the working population by 2020. And this is at a time when the number of younger workers (those aged between 16 – 49) will be decreasing.
So a lot of stats there, but what does it tell us?
In simple terms UK employers will have to retain some older workers for longer if they are to avoid a genuine skills gap and remain competitive with the wider global economy.
Yet two recent legislative decisions may make this rather difficult – or at least difficult to retain the best of the older employees. So what are these changes, and how will they impact on this issue?
The Abolition of the Default Retirement Age
The 2011 abolition of the Default Retirement Age provides workers with the right to continue in employment past age 65. This will of course go some way to bridging the skills gap, and the Office of National Statistics are already reporting a marked rise in the number of over 65’s remaining in employment. So problem solved then?
Eh, no – it’s not as simple as that. There is the little matter of employee engagement to consider here.
Let’s start with the positives. Many older workers represent the very best in employment qualities. Knowledgeable and dependable, they often form the backbone of any given business. Such individuals are obviously valuable assets to any employer, and it is therefore to be expected that efforts to retain such employees post age 65 would have taken place even had the abolition of the DRA not taken place.
Yet that is only part of the story. As with any age grouping, there will be some older workers who are disengaged with their job role and/or employer. There are stacks of evidence now to suggest that disengaged workers have a damaging impact on the employers bottom line. Such workers may very well be achieving the minimum standards for employment (and to avoid disciplinary action), but that does not mean that they are going the extra mile. Now the older disengaged worker is of course more likely to retire as soon as their financial planning allows for this. But what about those that don’t have adequate funds to retire?
If it’s a straight choice between an impoverished retirement or a decent standard or living (albeit with the fag of having to go to a job that they really don’t like), I think most disengaged older workers would probably take the latter. For this grouping it’s not about choice. They can’t afford to retire, so have no option but to continue to earn the daily dollar. It probably goes without saying that motivation could well be a problem here, and an unmotivated older employee may also present additional challenges for the employer by preventing new blood from moving up through an organisation.
Or to sum up, it’s a question of employers seeking to retain the right employees and skills for any given role.
So that’s one area of concern for employers. What’s the other?
Freedom of Pensions
The Chancellor’s recent announcements regarding much greater freedom to access pension funds from age 55 may also represent a major, if markedly different, challenge for employers.
Under Freedom of Pensions, relatively small pension funds (in pension planning terms) suddenly take on a different dimension and appeal. For instance, a pension fund of £100,000 would generate only a relatively small annual pension to a 55 year old, and not much to write home about even for someone at age 65. Yet Freedom of Pensions would allow the saver to access the £100,000 as a lump sum (albeit it with tax implications). Suddenly this modest pension fund seems rather seductive. It’s quite possible, perhaps even probable, that once enacted there will be significant numbers of older workers who leave the workforce earlier than either employer or employee would ever have envisaged prior to March this year.
Of course such funds won’t last forever, but that may be academic. By the time the retiree discovers the financial reality, they may have been out of the employment market for some years. Skills will be rusty, or overtaken by new developments, and a return to the workplace might be difficult or even impossible in some cases.
Freedom of Pensions will appeal to both the engaged and disengaged older employee. And even the most engaged employee often looks forward to the promised land of a comfortable retirement. So one possible outcome of this legislative change could be a haemorrhaging of the quality older employees that any organisation would wish to retain.
So, although these are very different issues, these two separate initiatives may in fact be two sides of the same coin as far as employers are concerned.
On the one hand we have possible retention of some disengaged older workers that just can’t afford to retire, on the other we have the loss of key employees who are seduced into believing access to retirement funds now represents their ticket out of the rat race.
It’s difficult to speculate on which will be the bigger challenge for UK employers, but either (or both) scenario post a potentially major headache for employers who need to retain their key older talent and remain competitive as workforce demographics start to change.
So what to do?
One possible solution perhaps stands out more than other here – the benefits of workplace financial education.
As a direct result of auto-enrolment, the government’s workplace pension reforms, most employees will soon be actively saving for their retirement. But to make a real difference to the savings gap, and the individual’s chances of a comfortable retirement, employees will need to better understand, and engage with, the dynamics of retirement savings.
Providing financial education will encourage employees to take a more active interest in their savings. Those disengaged employees who are desperate to leave the workplace may better appreciate that planning and early action will make this more achievable, and this may therefore lessen the numbers that fall into the “can’t retire” category.
By the same token, those highly skilled and better motivated employees may better understand the reality of longevity and annuity rates, and therefore are perhaps less likely to be seduced into an inappropriate early retirement at age 55. After all, just a few extra years work, and corresponding period of additional savings, may provide a much more satisfying and longer lasting retirement income stream.
So, whether the older employee coin comes down on heads or tails, it’s likely that financial education in the workplace may prove a winner for both savers and employers.