The cost impact of an ageing workforce

It is four years since the default retirement age was completely abolished in the UK in October 2011. Since then, some one million workers have taken advantage of the freedom to carry on working into later life, according to government estimates published by the Department for Work and Pensions in October 2014.


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  • As the workforce ages, employers will need to rethink the design and provision of healthcare and group risk benefit offerings.
  • Limited-term or flexible group income protection (GIP) provision is likely to become more commonplace, as employers try to retain some form of provision for older workers while keeping down costs.
  • But there is also likely to be greater emphasis on general health and wellbeing support and benefits, especially helping older workers to stay active and fitter for longer.

Last year’s introduction of a right to request to work flexibly has also made it, at least in theory, easier for employees to carry on working for longer, while April’s pension freedom reforms have given those approaching retirement much greater control over how, and when, they take a retirement income.

But what does this ‘greying’ of the workplace mean for benefits, especially age-weighted group risk benefits? How should employee benefits professionals structure their benefits strategies to meet the needs of the ageing workforce? How can they balance the rising cost of providing benefits to older workers against the need to retain, engage and motivate this increasingly valuable employee demographic?

Rising cost of healthcare provision

Rebekah Haymes, senior consultant at Towers Watson, says: “Employers are telling us they want to look after their older workforce because of the skills they have and the value they can give. But there is a challenge in terms of how you continue to provide benefits to an ageing workforce because it can, of course, be costly. The cost of risk and healthcare-related benefits is going up.”

This tension was clearly illustrated last year in research commissioned by Towers Watson and carried out by the Economist Intelligence Unit. The report, Is 75 the new 65? Implications of an ageing workforce on benefit design , published in July 2014, argued that as the proportion of workers delaying retirement continues to increase, employers will need to address the impact this has on benefit costs.

The report also suggested that employers will need to think more imaginatively about the design and provision of healthcare and group risk benefit offerings. For example, increases in group life assurance costs could be negated by replacing dependants’ death-in-service pensions with additional lump sums. Hikes in group income protection (GIP) costs could be mitigated by implementing limited-term GIP schemes with no upper terminal age.

“There is an opportunity for employers to rethink how they provide benefits, especially income protection benefits, says Haymes. “Also, thought needs to be given to how healthcare benefits are provided because of the impact of medical inflation and the cost of related long-term medical conditions.”

Limited-term options

When the default retirement age was phased out, group risk benefits were granted an exemption from the principle of equal treatment, irrespective of age, to allow employers the option, in principle, to cease to provide such benefits to those aged 65 or over who continued working.

In practice, however, and perhaps unsurprisingly, taking such a tough approach can prove problematic given the potentially negative message it sends out to older employees. This is particularly the case when organisations are keen to keep older workers on board and engaged, even if their approach to providing some benefits for this group does not reflect this. This is why options such as limited-term GIP can be attractive, says Steve Bridger, group protection director at Aviva.

“Limited-term group risk has its place, especially for the most cost-conscious employer or where [they] have a scheme in place that tends to be contractual, and so removing it is difficult but adjusting it is easier,” he explains. “When [employers] offer group risk benefits, and in particular GIP on a limited-term or flexible basis, everyone gets access to the core benefit, everyone gets access to a core level of support, and then people can top up to meet their own needs.”

Group risk auto-enrolment

There is also an ongoing debate within the insurance world as to whether, in time, an element of compulsion will need to be introduced into GIP provision, in much the same way as it has been for pensions through auto-enrolment .

Benefit reform is undoubtedly a key talking point when it comes to how employers should be responding to the ageing workforce. But Bridger, for one, argues that employers also need to take a wider perspective.

“How employers use, fund and tailor benefits to support older employers that are sick or have fluctuating or chronic health conditions is increasingly important,” he says. “But it is also important to be managing demand for such benefits by helping older employees stay healthier and more active for longer.

“It is about focusing not just on benefits strategies and structures but on general health and wellbeing , early intervention and rehabilitation, modifying roles and working hours, access to physiotherapy or occupational health, even just encouraging stretching exercises; it is about encouraging people to have fitter, more active lifestyles.” 

This may lead to the evolution of employee benefits. As Robin McConnell, senior consultant at Buck Consultants at Xerox, says: “Employee benefit provision will need to change, and will probably need to offer different options over and above the traditional pension or life insurance-style benefits. I think family care benefits could come more to the forefront, but we will also see innovations around different types of shorter to medium-term savings vehicles.

“From a health perspective, I also wonder if we’ll see more activity around something like chronic conditions cover; so cover to ensure an employee is not off for months waiting for a hip replacement on the NHS.”

Column: The challenges of an ageing workforce


When it comes to the challenges surrounding the ageing workforce, [many employers] will be interested in how compensation strategies will have to be adapted, for example, in terms of pay , different benefit packages and training programmes. And behind all this is the question of whether older workers are as productive as their younger counterparts, more productive or less productive. And, if they are, in what ways.

More important, however, and more provocative, is the question of whether we shall even have the older workers we think we are going to have. Yes, we agree that pension ages should be higher, and we expect that a greater share of the workforce will be older. But what we need to ask is whether the higher retirement age will actually be reached and, if it is, by how many.

Longevity has been increasing; indeed, it was this that motivated the state to raise the pension age. However, this begs two questions. The first, whether the increase in longevity will continue as projected is by no means as clear as might be presumed.

But the answer to this is closely related to the answer to the second: whether an improvement in mortality necessarily means an improvement in morbidity. Put simply, will the extra years people might have be ‘good’ years? This has been a matter of concern for those planning health expenditures and the provision of social care. It should also be one for those of us concerned with future labour force developments.

What is of interest is the morbidity of those in their late 50s and through their 60s in the later stages of working life. Although many physically demanding jobs are gradually disappearing, and risk factors such as smoking are reducing, there is something else looming on the horizon. These are what we call lifestyle-induced diseases or non-communicable diseases ; for example, type two diabetes.

Factors such as obesity, which can be a contributor to cardiovascular and musculo-skeletal problems, is another area of concern.

Some wellbeing issues associated with mental health could also be partially attributed to lifestyle-induced stresses , such as tighter schedules and controls, and the difficulties of combining work with domestic life, which is not helped by increased eldercare responsibilities .

Such are the real challenges that employers will have to confront. What can employers contribute to overcoming these challenges? And who else, individuals and governments, has a part to play in this?

Bernard Casey is principal research fellow at the Warwick Institute for Employment Research.

Case Study: Engaging and retaining talent among the older working population

Financial advice education-2015

In May, the charity Age UK launched a programme to help its 2,800 employees, two-thirds of whom are aged over 40, better plan their working lives and prepare for retirement.

Its Extending Working Life and Planning for Retirement programme includes midlife career reviews, health assessments , and financial and retirement-planning advice clinics. In terms of benefits it includes a generous contributory pension , flexible working and caring arrangements , a bikes-for-work scheme, health cash plan , discounted gym membership, employee assistance programme (EAP) and income protection, among others.

The charity made a conscious decision not to age restrict any of its benefits, explains Caroline Bendelow, people and performance director at Age UK. “The only area this has affected the cost is income protection . We may have to pay a bit more for the cover, but it is not a huge amount to pay for people who are important to us.”

Bendelow believes that, while employers will have to make their own decisions on this, this type of holistic proposition is going to become increasingly relevant for those wishing to manage, motivate, engage and retain an older working population.

“Because of who we are, we have to be exemplars about this. But I also believe a lot of organisations, a lot of commercial organisations, could learn from this,” says Bendelow.

She adds that the charity has already had interest from Marks and Spencer and Sainsbury’s about the programme.

Bendelow says: “One of the most significant things we’ve seen is the response from our midlife career reviews. These allow people to take some time out to think about their future – whether that’s to think about training they’d like, a different direction, their financial provision for the future, whether they’re paying enough into a pension and so on.

“For others, it’s just an opportunity to think about where they are and what they want to be doing. The earlier you can start planning and thinking about this, the better.”

But providing benefits, support and education needs to be just one part of the equation. Bendelow explains: “[We] can have the most amazing product, with all sorts of different elements, but it’s also critical that managers have the skills and confidence to have conversations about retirement, without the, ‘Oh, so you’re checking out’ response.”


 Source: Is 75 the new 65? Rising to the challenge of an ageing workforce, Economist Intelligence Unit and Towers Watson, July 2014, surveying 480 executives of organisations across 30 European countries.