The Retirement Dilemma - Sleepwalking Into a Crisis?

THE RETIREMENT DILEMMA – SLEEPWALKING INTO A CRISIS? DISCUSSION PAPER FOR HR AND REWARD DIRECTORS PARC SEMINAR PARTICIPANTS (15 SEPTEMBER 2016) Colin Haines FIA Dip.IEB

“While pension freedoms have given individuals more control over how to invest their retirement funds than ever before, this contrasts with a lack of financial know-how... and this problem will become more acute over time.”

CONTENTS

Contents About PARC, the author and acknowledgements

3

Foreword

4

1

The global demographic time-bomb

7

2

People are not saving enough

10

3

The call for UK employers to act

12

4

What will the future bring?

15

5

Financial Wellbeing

17

6

Appendix 1 – Aon Global Financial Wellbeing survey findings

21

7

Appendix 2 – Infographics

24

8

Appendix 3 – Further reading

26

Copyright © 2016 PARC Ltd. All rights reserved.

Published by PARC Ltd, One Heddon Street, Mayfair, London, W1B 4BD, UK. Telephone +44 (0)20 7432 4565 Apart from any fair dealing for the purposes of research, private study, criticism or review, as permitted under the Copyright, Designs and Patents Act 1988, this publication may only be reproduced, stored or transmitted, in any form or by any means, with the prior permission in writing of the publishers. Enquiries concerning reproduction outside these terms should be sent to the publishers at the above address.

2

ABOUT PARC, THE AUTHOR AND ACKNOWLEDGEMENTS

Colin Haines Partner International Retirement & Investment +44 (0)20 7086 9280 +44 (0)7949 449 090 colin.haines@aonhewitt.com

About the author

About Aon

Colin Haines is a Partner of the International Retirement & Investment department at Aon where he advises international organisations on global retirement management, including several FTSE 30 companies.

Aon plc (NYSE:AON) is a leading global provider of risk management, insurance brokerage and reinsurance brokerage, and human resources solutions and outsourcing services.

Through its more than 72,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative risk and people solutions. For further information on Aon’s capabilities and to learn how they empower results for clients, please visit: http://aon.mediaroom.com/.

Colin chaired Aon Hewitt’s 2015 Global Defined Contribution webinars; and coleads Aon’s global thought leadership on retirement governance. He has previously worked in Sweden and for BAE Systems plc. Colin is a UK actuary and Senior Examiner for the International Employee Benefits Association.

Acknowledgements PARC would like to thank Colin Haines for authoring the research.

About PARC PARC was founded in 2004 to provide a centre of excellence for the development and management of high-performing organisations.

Through the provision of informative and challenging research and briefings, PARC enables HR and Reward Directors to engage with leading thinkers, expert practitioners and each other on the key issues affecting today’s organisational performance, reward and governance agenda.

For more details on how your organisation can benefit from membership of PARC please contact Richard Hargreaves, Commercial Director, on +44 (0)20 7470 7287 or at richard@parcentre.co.uk.

Alternatively, please visit our website at www.parcentre.com.

3

FOREWORD

FOREWORD Context

“We have witnessed a dramatic global shift… towards private retirement saving plans, in which benefits depend on the value of accumulated assets… This has transferred significant risks from the state and employers to individuals… accompanied by a trend towards lower overall contribution rates. Together these developments raise very significant concerns about the adequacy and security of future retirement income at a time when longevity is increasing and when the global experience of low returns and high volatility, following the 2008 financial crisis, have reduced public confidence in retirement savings.”

– Organization for Economic Co-operation and Development/Cass Business School “We need to act now and focus in the first instance on preventing individuals’ catastrophic withdrawal from the labour market, and where we cannot, support older workers to re-enter the world of employment. We owe it to those people who might otherwise be left behind. People like the person in their 50s who wants to work, but cannot because they have caring responsibilities or the worker who can no longer do their strenuous manual job because they have a bad back. It’s time to change the conversation about extending working life from one about working “until you drop”, to one about a fuller working life, that means working as long as is necessary to create the future you want.” – UK Government, Fuller Working Lives Report, 2015

Two questions

With competition for the best talent increasingly fierce in this era of global skills shortages, could employers that help support employees in the run up to retirement gain an edge?

If employers ignore this question, could they be sleepwalking into a crisis; and end up with a workforce that cannot afford to retire, or votes with their feet and look to find employers that can provide effective support as retirement draws nearer?

Purpose of this paper

Background

This paper, and the PARC Retirement Strategy Seminar on 15 September 2016, provides employers with information and views to help address the above questions, and to provoke ideas for discussion. However, this issue is not specific to the UK. This paper draws upon research from around the world in order to bring a global dimension to a global challenge.

Almost all countries in the world, not just the UK, have challenges in providing sustainable and adequate pensions to individuals. A number of factors pose threats to the ability for individuals to be confident that they will be able to retire with adequate retirement income. These include increased life expectancy; pressures on state pension systems; challenging economic environments; widespread closure of guaranteed salary-linked pension plans; increased labour mobility (with people working with multiple employers, often in different countries, during their working lives); and poor consumer confidence in financial/retirement saving products.

Employers are increasingly paying attention to the rising cost of healthcare, and to helping their staff stay fit and productive. Retirement planning, meanwhile, can seem less of a priority – especially for younger workers. The current low-interest environment is causing low rates of returns, discouraging savings. Equity markets across the world (and especially in Continental Europe) have been very volatile in the last 12 months. The result of the recent UK referendum on EU membership has resulted in more market turmoil around the world. Pension scheme members in any country, not just the UK, are impacted by these events. Bond yields have been reducing

4

FOREWORD

significantly in recent years, with further falls following the UK referendum, and this has pushed up the cost of providing annuities. Indeed, the cost of purchasing annuities has risen by 50-100% in many countries over the last decade.

What’s more, the different options for pension investments are little understood by employees – who are increasingly responsible for their own financial futures – making “education” increasingly more important.

So how much do employees need to save to ensure a comfortable retirement – and how do they want their employers to help them with navigating the complexities of long-term financial planning – and how can employers best support older workers in the period up to retirement?

All these issues bring challenges to employers; as does the whole concept of retirement. For many employees, retirement may not be a single event when they stop work completely. Employees may want to phase into retirement gradually; and look to work for employers that can provide a flexible working environment for older workers.

Employers now have a golden opportunity to differentiate themselves in terms of how they help employees approach retirement. This can be done through HR strategies; flexible working patterns; financial wellbeing programs and effective retirement plan communications.

Contents

This paper contains sections covering a range of topics to help stimulate discussion.

• The global demographic time-bomb. Pensioners are living longer, and there will be significant falls in the size of the global working population relative to total population.

Within Europe, there are roughly four working age adults to support those too old or too young to work, but by 2050 will reduce to two working age adults per dependant.

This poses significant issues for employers.

• People are not saving enough. Average contributions to defined contribution plans in the UK and US are below levels required for employees to achieve target levels of retirement income. Employees will need to save more, or defer the age at which they will become dependent upon their retirement income in order to bridge the gap.

• The call for employers to act. Despite employers being very positive about the benefits and productivity of employing older people; many employers do not have formal policies to support older workers for later life working. The UK Government’s 2015 Fuller Working Lives Report shows that there is scope, and a business benefit, for employers to do more to support older workers who want to stay in the workforce.

• What will the future bring? The UK government has stated that a significant number of people have left the labour market early, which comes at a significant cost to the economy, business and society as a whole. They have said it is time to change the conversation about extending working life, from one about working “until you drop”, to one about a fuller working life.

5

FOREWORD

• Financial Wellbeing. At Aon we define “financial wellbeing” as “the ability to manage your financial life today, while preparing for the future and anything unexpected along the way”.

Providing financial advice at retirement is too little too late. Financial education needs to be a long-term process, and address the differing needs of multiple generations. Managing employees’ financial wellbeing is becoming increasingly important; and will continue to grow in future years as more workers participate in Defined Contribution and other savings arrangements. Furthermore, recent evidence from US and Australia suggests that women face significant stumbling blocks when it comes to saving enough for retirement. Making retirement and financial wellbeing a priority is paramount for overcoming those challenges.

Steps for employers to take

Aon’s view is that employers that take an active role in helping workers improve their financial wellbeing and save more for retirement will benefit both men and women. Small changes to plan design and improved focus on day-to-day finances can go a long way to help employees close their savings gap, including: 1. Offer tools to improve overall financial wellbeing. According to Aon Hewitt’s 2016 Hot Topics in Retirement Study, expanding financial wellbeing is the top employer initiative for 2016; with 56% of employers saying they are very likely to focus on this during the year (compared to just 30% in 2014). 85% of employers think “it’s the right thing to do”. The top three tools and resources being offered in the US in this area are financial market education, budgeting and debt management to help employees better manage day-to-day and long-term financial plans.

2. Provide financial education and access to professional investment help. Experience from other countries shows that workers who use professional investment help in the form of managed accounts, target-date funds, and who have access to financial education fare better than those who invest on their own. Offering access to these investment options as well as online or in-person advice can help workers benefit from the expertise of professionals and potentially improve their long-term financial outlook.

3. Add plan features to increase savings rates. Helping workers save more should happen from the moment they join their employer’s DC plan. In the US only 1 in 5 employees are projected to have retirement savings that exceed the amount needed at age 65; and consequently the typical employee will not be financially ready to retire until aged 68.

Defaulting workers into the plan at a higher savings rate can make a significant impact on long-term savings. Employers can also add automatic contribution escalation features that will slowly increase workers’ savings rates over time.

6

1 THE GLOBAL DEMOGRAPHIC TIME-BOMB

THE GLOBAL DEMOGRAPHIC TIME-BOMB People are living longer in all countries

Life expectancy has been increasing in all economies around the world; and is expected to increase further in the next 30 years. Increasing life expectancy pushes up the cost of state and private pensions; and also puts pressures on the working population who have to support an increased number of retirees.

Increased life expectancy will result in increased numbers of older people. At the moment, around 48% of the retirement-age global population does not receive a pension; so if more people live for longer the cost to society of supporting those without a pension will increase further.

The United Nations calculate that there were 901 million people in the world’s population aged 60 or over in 2015; but this is projected to rise to 1.4 billion in 2030. By 2050, the number will increase to 2.1 billion, and by then there will be more older persons than children under 15.

By 2050, the United Nations calculates that the median age will have increased to 36.1 years (compared to 29.6 years in 2015).

67% of older pensioners currently live in developing countries. Due to population growth and increasing life expectancy in emerging economies, the numbers of older people in emerging economies will increase; and this will place more pressure on these countries in order to support the larger population of older people.

United Nations data for G20 countries

Data from the United Nations in the chart on the next page shows that, amongst G20 countries, pensioners in Japan, France and Italy currently have the longest life expectancy at age 65. Life expectancy for male pensioners in the UK is the same as in Germany; but lags life expectancy for all other G20 countries in Europe and North America.

As a rough rule of thumb, life expectancy for pensioners at age 65 is increasing by one year each decade. Amongst G20 countries, life expectancy for males aged 65 has increased by 3.3 years between 1985 and 2015; and is expected to increase by another 2.8 years between 2015 and 2045.

7

1 THE GLOBAL DEMOGRAPHIC TIME-BOMB

Life expectancy in G20 countries for male age 65 Japan France Italy Australia Canada Republic of Korea United States of America Germany United Kingdom Mexico Brazil Argentina Turkey China Russian Federation Saudi Arabia

1980 –1985

India

Increase to 2010 –2015

South Africa

Projected increase 2040 –2045

Indonesia 65

70

75

80

85

90

95

Source: United Nations Department of Economic and Social Affairs, Population Division (2015).

World Population Prospects: The 2015 Revision.

Trends in Europe

However, the countries with the highest proportion of over 65s are expected to change radically in the next 30-40 years. Within Europe, northern and western Europe countries currently have the older populations. The maps below show that by 2060, many countries in eastern Europe will have the highest proportions over age 65. By 2060, the percentage of Europeans aged over 65 is projected to nearly double (from 16% in 2010 to 29% in 2060).

Member States with proportions of over 65s above the EU average in 2010

Member States projected to have proportions of over 65s above the EU average in 2060

Publication: ILC-UK report on Europe’s ageing demography, November 2014.

8

1 THE GLOBAL DEMOGRAPHIC TIME-BOMB

The number of working age adults to support those who are too old, or to young, to work is expected to halve in the next 40 years

An ageing population poses challenges for society, governments and employers. The working population relative to the total population is expected to halve. In 2010 there were roughly four working age adults to support people who are possibly too old (i.e. over age 65), or too young (i.e. under age 15), to work. EuroStat forecasts show that by 2025 there will be just three working age adults per dependent; and in 2050 there will only be two working age adults per dependent.

In 2013, the EU reached a target of have 50% of those aged 55-64 employed. Despite this, the employment rates of older workers lag significantly behind the rest of the population (see below).

European dependency ratios in 2013 and 2060

60 50 40

2013

30

2060

20 10 Slovakia

Cyprus

Ireland

Poland

Romania

Luxembourg

Slovenia

Czech Republic

Malta

Hungary

Spain

Netherlands

Austria

United Kingdom

Croatia

Belgium

Lithuania

EU-28

Estonia

France

Denmark

Latvia

Finland

Bulgaria

Portugal

Greece

Sweden

Italy

0 Germany

Source: EuroStat

Employment rates of different age groups EU (28 countries) 90 80 70 60

Percent

Dependency Ratios

70

50

15-24

40

25-54

30

55-64

20 10 0 2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Source: EuroStat

9

2 PEOPLE ARE NOT SAVING ENOUGH

PEOPLE ARE NOT SAVING ENOUGH Current savings are not enough

Back in 2004, a Pensions Commission appointed by the UK government provided recommendations for a new pensions policy in the UK. This paved the way to auto-enrolment and state pension reforms.

The Commission proposed that the minimum contribution for auto-enrolment should be around 8% of earnings (including employer and employee contributions as well as the benefit of tax relief). This level was adopted by the UK government.

However the Commission stated that this would not be enough to provide a reasonable level of pension for most people and that the average earner might need to contribute about double the default amount, around 15%, in order to achieve a more reasonable pension outcome (broadly a target pension of two-thirds of earnings including state pension).

Since then the financial market conditions have worsened. In particular, the cost of providing an annuity at retirement has increased. Therefore, if 15% was considered to be an appropriate savings level in 2015, then it is likely that this will need to be at least 20% now. If government bond yields remain at their post-Brexit level, or fall further, a total contribution of 25% may be needed by many – especially workers who have reached their later-30s or older and have limited funds set aside for future retirement needs.

UK workers are not saving enough

Many members of UK DC pension plans may not be saving enough. A recent joint survey by Aon Hewitt and Cass Business School found that 24% of employees pay less than 5% of their income into a pension. 60% of DC plan members expect to retire on 50% of their current salary or less. Combining the two means that a significant number of DC plan members may need to save more in order to have the level of retirement income currently enjoyed by current pensioners in defined benefit plans (which typically target a pension of 67% of final salary after a full career). The alternative is too accept that retirement income will be lower, and to make appropriate lifestyle changes in retirement.

US experience

Similar issues with low saving rates are seen in the US. The current average level of savings is not sufficient for most employees to expect to be able to retire by the traditionally-targeted age of 65. Aon Hewitt’s Real Deal study in the US found that the average contribution to US DC plans in 2015 was 12.1% of salary (of which 7.7% paid by employers; and 4.4% by employees).

This is less than the amount needed to achieve a reasonable pension outcome at age 65. A total average contribution of 17% of salary would be needed to provide a pension to main living standards upon retirement at age 65.

10

2 PEOPLE ARE NOT SAVING ENOUGH

How much should people be saving?

Retire age 65

17% of Salary

Retire age 67

14% of Salary

Avg. 2015 rate

7.7%

4.4%

Employees

Employers

0%

5%

12.1% of Salary

10%

15%

20%

In the US, Aon Hewitt’s view is that employees need to have 11x salary in their pension fund at retirement in order to maintain living standards at age 65. Currently only one in five employees are expected to have savings that exceed this amount at age 65; and three out of five employees face the prospect of having to make big standard of living changes in retirement. Unless individuals start saving significantly more, employees may need to work until an average age of 68 in order to be financially ready to retire. Employers are in a position to help employees set realistic expectations.

US experience – assessing whether to help employees with financial savings

UK employers can also look to their counterparts when assessing whether or not to help employees with their financial savings.

In the US, employees face a variety of challenges when it comes to saving for retirement, from budgeting for every-day life events to managing debt to setting aside money for unexpected emergencies. Employers are providing more tools and resources to address these needs and truly make an impact on workers’ long- and short-term savings goals. Aon surveys have found that employers are doing this because they believe it is the right thing to do and because it increases employee engagement.

Why are employers helping?

Is it the right thing to do

85%

Increase employee engagement

80%

Improve retirement statistics

58%

Decrease employee time spent on financial issues

44%

Employee demand for programs

33%

Decrease medical cost

26%

0%

20%

40%

60%

80%

100%

11

3 THE CALL FOR UK EMPLOYERS TO ACT

THE CALL FOR UK EMPLOYERS TO ACT The employment market for older workers

There are more older people in employment in the UK than ever before; with 9.2m workers aged 50 or over in 2015 (compared to 7.2m workers aged 50 or over in 2003). By 2022, the Office for National Statistics projects that number of people aged between 50 and State Pension Age will increase by 3.7m.

Currently the UK employment rate for 55-64 year-olds is around 60% and whilst this has been increasing for the past 10-15 years, the recent improvement has been relatively modest compared to many other nations. Several countries achieve employment rates of around 70% or above, so there is significant room for improvement.

In the UK there are currently 2.9m people between 50 and State Pension Age who are not in work. Within this group, there are 1.7m people who would like to work but think it is unlikely they will ever work again (1.0m are sick or disabled; 0.4m are caring for someone; 0.3m have given up looking for work after losing a job). This is a significant number of people who have left the labour market early. This could have serious implications on their health, wellbeing and incomes, and as the government has stated comes at a significant cost to the economy, business and society as a whole.

Making sure employers have the right policies in place to support older workers, while also helping them to achieve their retirement ambitions has never been so important.

Keeping older people in work to meet future labour demand

Looking to the future, keeping more older people in work will be crucial to meet future labour demand; and also boost the economy. Research by the International Longevity Centre, The Prince’s Initiative for Mature Enterprise and Business in the Community forecasts that getting more people aged over 50 back into work could boost the UK economy by £88bn a year.

In the 10 years from 2012 to 2022, employers expect a significant number of new jobs to be created in the UK economy, and the combination of more older people and more new jobs means that the labour market and our attitudes towards older workers must evolve to meet the challenge.

Over this period, forecasts show that over 10 million new jobs will need to be filled as baby boomers (i.e. those born between 1946 and 1964) come to the end of their working lives.

Experts have predicted that vacancies in management, leadership and specialist roles will become increasingly difficult to fill.

Experts have also said that employers may need to rethink their approach to retaining and attracting staff. The next generation of workers (i.e. those born after 1964) are more likely to be “working to live not living to work”, and require a more social and friendly working environment.

Benefits of employing older workers

12

The government has said that spending longer in work is key to providing adequate living standards in retirement. Furthermore, there is evidence that work is generally good for physical and mental health and wellbeing. Research suggests that unplanned early labour market exit can be harmful to overall wellbeing, particularly where there is less social interaction in retirement.

3 THE CALL FOR UK EMPLOYERS TO ACT

Their evidence suggests that employers who fail to retain their older workers are losing important skills from their workforce, and the premature loss of older workers can lead to loss of output and higher recruitment costs for employers. Despite some outdated stereotypes there is no systematic evidence that older workers are less productive than younger workers.

In 2015, the government polled 689 business decision makers in private sector businesses of all sizes to explore their organisation’s policies and practices around later life working.

Organisations provided good reasons for employing people over the age of 50:

 87% of respondents stated that the specific skills of workers aged 50 were suitable for their business

 over three-quarters (76%) of respondents said that the ‘experience of workers aged 50 or over’ was a main benefit of having them in their organisation  21% of employers said that workers aged 50 or over were more productive than younger workers (68% said they were equally productive)

 nearly a third (32%) said that workers aged 50 or over were easier to manage than younger workers (54% said equally)  over half (53%) said that workers aged over 50 were more reliable than younger workers (42% said they were equally reliable)

 only 3% of respondents thought that there were no benefits to having workers aged 50 or over in their organisation.

Challenges associated with employing older workers

However, employing older workers does have challenges. Almost three-quarters of companies said there were some challenges in employing workers aged 50 or over, of which health-related absence was most frequently quoted as the main challenge (selected by 30% of respondents).

This was followed by concerns over employees retiring soon (28%) and out of date skills or qualifications (21%).

Support for older workers

Despite employers being very positive about the benefits and productivity of employing older people; many employers do not have formal policies to support older workers for later life working.

The UK government’s Fuller Working Lives Report shows that there is scope, and a business benefit, for employers to do more to support older workers who want to stay in the workforce.

• Nearly a third (32%) of organisations do not offer any opportunities specifically to support later life working. Large businesses were more likely than small businesses to offer opportunities to retrain; to go on courses to update skills; or offer employees the opportunity to train younger people.

• When asked what support for later life working was offered by their organisation, the most common response was the opportunity to work part-time (35% of organisations offered this).

• This was followed by the opportunity to work flexibly (33%) and the opportunity to gradually reduce hours (29%).

13

3 THE CALL FOR UK EMPLOYERS TO ACT

Employees are not satisfied with employers’ efforts to help them manage their finances

It is no surprise that many employees are becoming concerned about their ability to be ready for retirement. A recent study from Barclays (see chart below) in the UK found that 46% of employees frequently worry about their finances. Although only one in five feel that this negatively impacts on their work; 80% of employees are not satisfied with their employer’s efforts to help them manage their financial wellbeing.

The impact of Financial Wellbeing on employees

14

46%

20%

38%

80%

Employees frequently worry about their finances

Feel their financial situation negatively impacts on their work

Would move to a company that prioritises financial wellbeing

Are not satisfied with their employer’s efforts to manage their finances

4 WHAT WILL THE FUTURE BRING?

WHAT WILL THE FUTURE BRING? Changing the conversation

The government has made the case that a significant number of people have left the labour market early, and this could have serious implications on their health, wellbeing and incomes, and comes at a significant cost to the economy, business and society as a whole.

They have said it is time to change the conversation about extending working life from one about working “until you drop”, to one about a fuller working life, that means working as long as is necessary to create the future you want.

The future of retirement

The Daily Telegraph’s Richard Dyson recently wrote on the biggest way in which our retirement finances are changing. He came up with six factors: • in future workers will retire more in a series of stages – not just cease taking a wage in one shot • workers will have more sources of retirement income than is now typically the case • the state pension will become more important – even if it’s less generous – because it will be many people’s only source of guaranteed, inflation-proofed income • more people will move into semi-retirement or retirement while still servicing a mortgage • homeowners will have greater need to take equity out of their property to keep afloat • annuities will become more popular again, especially in later life, because of the valuable certainty they provide.

Employers and employees will no doubt relate to these factors, and employers will need to be able to respond to the changing needs of older workers. The financial services industry will also need to innovate in order for suitable well-regulated vehicles to be provided to address these needs.

What could happen in a ‘work until you drop’ world

A recent report commissioned by UK Labour party, gave a message that “the alternative to saving for retirement is to delay retirement, perhaps indefinitely”. Working indefinitely, that is ‘working until you drop’, will not be enticing for many employees and their employers.

Michael Skapinker of The Financial Times suggested the following five possible scenarios in a March 2016 article 1: • employers decide it is the workers’ problem, not theirs (employers may do little to encourage employment of older workers, other than to comply with age discrimination rules) • both employer and employees accept that people will work longer and everything in their careers will happen later (unable to afford retirement, employees will resist attempts to force them to retire and the workforce will, on average, become older) • later retirement introduces a golden age for women workers (as women, who have worked part-time or have taken career breaks, return to the workforce for one or two decades) • companies go for the “Carlos Slim” option, with older workers reducing hours, perhaps with different roles, instead of retiring completely • older workers make their own way in their world (e.g. becoming self-employed, and offering services to whoever will pay for them).

This reinforces the importance in employers deciding how they deal with the problem of their employees not being able to afford to retire.

1

Five possible scenarios for a ‘work till you drop’ world, Michael Skapinker, Financial Times

15

4 WHAT WILL THE FUTURE BRING?

Employee benefits in a “fuller working life” environment

Employers can make various changes to employee benefits to be more supportive of older workers.

• Phased and flexible retirement programmes can be popular, by allowing employees to gradually reduce hours; or move to different roles in the run-up to retiring from the workforce.

• Financial education will help employees to improve their understanding of financial matters, and help with decisions on savings and retirement planning. Such education can be provided through a variety of channels including technology platforms, seminars, and meetings with financial planning experts.

• Health-related benefits, such as private medical insurance, medical checks and income protection, are valued highly by older workers.

• Flexible hours, especially to allow older employees to feel supported if they need to take time off for health reasons or to care for dependants, is likely to be welcomed by many older employees.

US experience

These scenarios are not specific to the UK. Indeed, similar issues are faced in most other countries around the world.

In the US, a report published by the Federal Reserve in 2014, found that “the expectations for one’s path to retirement vary considerably with age, with the expectations of traditional retirement shrinking as people approach traditional retirement ages”. While 58% of retirees followed the traditional model of working full-time and then retiring completely; only 26% of current workers plan to pursue the same approach.

In the US, workers are now considering a number of options. US News outlined the following in an article in 2014: • working for as long as possible (28% of workers aged over 60 plan to stay on the job indefinitely) • switch to a part-time job (18% of workers in their late 40s and 50s plan to do this) • work for yourself (10% of workers would prefer to retire from their current career, and then work for themselves) • cut back on hours (10% of workers would like to work fewer hours as they reach retirement) • never retire (6% of workers, including just 3% of those in their 60s, say they do not plan to retire) • start a new career (6% of people who retired from a previous career later worked on a new full-time job).

16

5 FINANCIAL WELLBEING

FINANCIAL WELLBEING What is Financial Wellbeing?

Employers and pension providers are now looking at ways to help employees plan for retirement.

However, for many individuals, providing financial advice at retirement will be too little too late.

In order to help employees plan ahead and make informed saving decisions, employers and providers will need to find ways to help employees in a range of financial decisions.

Aon’s view is that communication tools and channels tools in this area fall into the wider category of “financial wellbeing”. One definition of this is “the ability to manage your financial life today, while preparing for the future and anything unexpected along the way”.

We believe that managing employees’ financial wellbeing is becoming increasingly important; and will continue to grow in future years as more workers participate in Defined Contribution and other savings arrangements.

Surveys in the US have found that employees who have higher overall wellbeing have higher levels of engagement in their work; higher productivity; lower absenteeism; and lower turnover.

However many employees have financial challenges. Our US surveys also show that over-half of US employees, across many employers, are feeling that they are just getting by financially or having financial difficulties; and 30% feel that debt is ruining their lives. Financial difficulties can lead to stress; and this is major factor in employee wellbeing. Further highlights from our financial wellbeing surveys in the US and other countries can be found in Appendix 2.

Consequently there is a vital link between financial wellbeing and individual and company performance. More employers, in many countries, are now introducing financial wellbeing programs as part of their employee benefits programs. A key element of these programs is targeted communication to different groups of employees using multiple channels including the use of online technology.

Types of Financial Wellbeing initiatives

Financial wellbeing initiatives can be in many forms. The prevalence of these differs by country.

For example, almost all of the below initiatives can be found in US, UK and Germany.

• Employee Assistance Programs (with financial capabilities).

• Financial Literacy online training.

• Financial modelling tools.

• Flexible or voluntary benefit options.

• Phased retirement alternatives.

However, the initiatives below are now being used by UK and US employers; but are less widespread amongst German employers.

• Savings and investment workshops/coaching.

• Automated online advice (Robo-advice).

• Retirement preparation workshops.

• Financial Fitness Assessment.

• Financial wellbeing classes.

17

5 FINANCIAL WELLBEING

Automated online advice (“Robo-advice”)

In November 2015, we asked senior Aon retirement leaders in 27 countries in six continents to provide insights on the prevalence/sophistication of ‘robo-advice’ (i.e. automated, online advice at low to no cost). We also asked if they expected to see this grow significantly in the coming years.

A summary of the responses is as follows: Education Focus

Interested/ Developing

Face to Face Preference

• • • • • •

• Ireland • Austria • Netherlands • Canada • Singapore • Denmark (web enabled) • South Africa • Puerto Rico • United Kingdom (present)

Australia Brazil Hong Kong Italy Puerto Rico United Kingdom (future) • US

No Market

Provided by Financial Institution (“free”)

• • • • • • • •

• • • • •

China France Germany India Japan Rest of Africa Russia Switzerland

Argentina Finland Mexico South Korea Spain

The responses were interesting as they were not affected by whether an Aon business in that country had an advice business currently or not. Instead the answers were more dependent on the design of the retirement system, culture and prevalence of the insurers/banks in the system. There was also variation on the interpretation of ‘advice’ with many countries limiting it to investment choice or believing these types of services are not ‘advice’ rather education related. The level of investment choice available to participants in a particular market also impacts on the responses received.

Reflecting the dominance of employer driven benefits, even those countries where there was no market or advice was provided by the financial institutions, there is interest in simple low cost solutions expanding beyond retirement which could be provided by employers to their employees.

Most countries also mentioned the need for greater financial education, not just product issuer advice, as well as increased transparency on provider fees. It was noted in many countries, that advice was either already bundled into institutional fees or perceived and marketed as ‘free’ which, in our view, devalues the perception of independent broad based advice.

Overall, our internal survey indicates that robo-advice may well grow in a number of countries, but this will not be the only form of financial wellbeing offering offered to employees.

Dealing with different generations

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Also the shape and characteristics of workforces have changed considerably and there are now up to four generations in the workplace for the first time ever (Baby Boomers, Generation X, Generation Y, Millennials). Couple this with a growing contingent of international employees, dual income families and flexible work patterns mean that effective communication of employee benefits and rewards is becoming far more complex. The one-size-fits-all approach to benefits is no longer fit for purpose, the solution requires more flexibility, choice and consideration of the different needs of each generation.

5 FINANCIAL WELLBEING

Differences in retirement planning for men and women

There are views that the potential crisis with retirement planning is several years away due to many people still retiring from generous defined benefit pension schemes. Once people start retiring from defined contribution plans, on lower pensions than from defined benefit plans, then the retirement crisis may really hit society.

However, for many people, the issue of having a low retirement income is already apparent, and the problem is with us now. Until now, employers did not have to enrol and pay contributions into an employee’s pension scheme. Many employees, especially those working for small employers, are now joining pension plans for the first time.

Women in particular may face significant challenges. Many women retiring now may not have built up pension rights in the 1970s and 1980s as a result of taking career breaks, working for employers that did not provide pensions, and tough eligibility requirements (e.g. joining age of 30). Women who left the workforce to bring up children in the 1970s, 1980s and 1990s may have found that, upon returning, they could only join new hire defined contribution plans. As such, they have not been able to build up the same level of benefits as men may have done, especially men who have been able to remain in a defined benefit plan with their employer.

When considering how employees can have a fuller working life and to prepare for retirement, it is essential that considerations are given to possible differing needs of men and women.

Saving habits for men and women in US

A recent Aon Hewitt study in the US (which examined the retirement saving and investing behaviours of approximately 3.5 million defined contribution (DC) participants from more than 125 employers) found that men and women are on equal footing when it comes to DC plan participation (with both 79% of men and women participating in US DC, or 401(k), plans).

However this equality doesn’t hold true when evaluating overall retirement readiness. Women face significant stumbling blocks when it comes to saving enough for retirement, including longer lifespans, lower salaries and a greater likelihood of taking hardship withdrawals from their DC plans. Making retirement and financial wellbeing a priority is paramount for overcoming those challenges.

Aon Hewitt’s data reveals 83% of US women aren’t saving enough to meet their needs in retirement, compared to 74% of men. On average, women are contributing 7.5% salary to their DC plan, more than a full percentage point behind their male counterparts (8.7%) creating a gap in savings. Lower savings rates combined with disparities in salaries are contributing to low 401(k) plan balances for women. In 2015, women had an average plan balance of $71,060 compared to $119,150 for men.

Aon Hewitt also projects women will need 11.5 times their final pay to meet their needs in retirement, compared to just 10.6 times pay for men. However, there is a gap of 3.3 times pay between what women need and what they’re actually on track to have saved in order to retire at age 65. For men, the difference between needs and resources is just 2.0 times pay. This shortfall means women, on average, will need to work until age 69 – one year longer than men in order to meet 100% of their needs in retirement.

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5 FINANCIAL WELLBEING

Improving the retirement situation for women – Australia example

Similar issues are seen in Australia. In 2015, a study by a prominent Australian bank, ANZ, estimated that 90% of women will retire without adequate savings to support a comfortable lifestyle. Association of Superannuation Funds of Australia research indicates that women save $102,000 on average for their golden years, compared with $197,000 for men.

The recently released Senate inquiry into the economic security for women in retirement report noted that women are at greatest risk of living in poverty in retirement. Aon data shows that, on average, women have lower retirement account balances than men, with the biggest gaps in amongst baby boomers. Some of these differences are caused by differences in pay; but the gap is also due to the fact that older generations didn’t have compulsory superannuation until 1992, that many women above age 45 would have been primary caregivers for their children and that potentially many are now caring for ageing parents. The National Centre for Social and Economic Modelling (NATSEM) noted that there are about 2.7 million unpaid carers in Australia.

There is no one-size-fits-all solution to these problems, but a multifaceted approach from employers, the government and female super members can give women greater control and flexibility over their retirement future. The more common items for discussion in improving the retirement situation for women are: 1 evolving employee benefit practices where employer superannuation contributions are maintained throughout paid and unpaid parental leave 2 more equitable tax treatment of superannuation for lower paid 3 accessing financial advice to empower informed decision making 4 achieving gender pay equity.

The Senate Inquiry report makes 19 recommendations intended to improve female superannuation balances so that they can achieve economic security and dignity in retirement.

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6 APPENDIX 1 – AON GLOBAL FINANCIAL WELLBEING SURVEY FINDINGS

APPENDIX 1 – AON GLOBAL FINANCIAL WELLBEING SURVEY FINDINGS Financial Mindset Study, Insights into Employees’ Financial Perceptions and Behaviour (2015)

Aon Hewitt’s Financial Mindset Study comprehensively explores employees’ financial and savings attitudes and behaviours, including confidence, literacy and engagement, saving intentions, retirement benefits, and communication preferences. Our most recent study observed that: • employees are optimistic but want to feel more confident when it comes to their financial situation. Employers should provide basic, easy-to-access financial education to improve financial literacy and security among employees • employees are concerned about their short-term and long-term financial needs, and they want to be seen as financially responsible and prepared. Employers should provide a variety of tools and resources to meet the diverse needs of their people and help them take appropriate steps towards a more confident financial future • employees say they understand the need to save but lack full confidence when it comes to investing and planning for their future. Employers should offer tools and resources that empower employees to improve their financial wellbeing • employees say their employer retirement plans are good, but they want more support there and in other financial areas. Employers should create an environment of ongoing and relevant (timely and targeted) communication and education.

US: Aon Hewitt: 2016 Hot Topics in Retirement and Financial Wellbeing

In the US, Aon has seen significant changes in the focus employers place on financial benefits.

For 12 years, Aon has carried out an annual survey that examines the financial benefit focus areas for employers in the forthcoming year. The 2016 survey included responses from over 250 employers covering nearly 7 million workers.

12 years ago, employers were concentrating on increasing employees’ perception of their DC plan’s value. More recently employers have focused on mitigating risk and assessing appropriateness of retirement plan designs. Over the next 12 months, we expect to see a marked shift in how employers are helping employees gain a solid financial footing.

• Employers are making great strides in expanding their financial wellbeing services, tools and educational campaigns to employees. These include information on Basics of Financial Markets; Budgeting; Debt Management; Financial Planning; Saving for Life Stages; Prioritising Savings. 56% of US employers indicated they are very likely to create focus on the financial wellbeing of employees in ways that expand beyond retirement decisions. Helping employees understand the basics of financial markets is the most popular initiative (provided by 46% of employers).

• Employers are offering employees a bevy of tools and services to improve financial wellbeing (55% of employers already offer help in at least one category of financial wellbeing products).

89% of employers indicate they are very or moderately likely to add tools, services, or communications to expand their financial wellbeing focus. 66% of employers already offering online modelling tools or mobile apps to help employees determine how much they can spend in retirement; and 66% of the remainder intend to offer these tools in 2016.

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6 APPENDIX 1 – AON GLOBAL FINANCIAL WELLBEING SURVEY FINDINGS

• Employers are providing more assistance to near-retirees to help them navigate the retirement process (20% of employers have increased the level of automation, self-service and/or web access to retirement plans so workers can more easily start their retirement process. 89% of employers are planning to increase their communication efforts to workers regarding the retirement process).

• Employers are looking to ways to help employees preserve money earmarked for retirement income.

UK: Aon DC Member Survey “In a brave new pensions world what will DC members really want?”

In 2014, Aon carried out a survey of 2,000 individuals in UK DC pension schemes. The survey results in this paper provide an invaluable insight into the behaviours, expectations and concerns of members. Our survey reinforces the message for employers and trustees to engage more with their scheme members.

One third of our survey sample intends to make these important retirement-related decisions on their own, or with the help of friends and family. But the very high proportion of DC members that currently invest in their default DC investment option probably indicates that members do not engage much with the investment process prior to retirement. Another quarter of the respondents said that they would seek the help of an Independent Financial Adviser (IFA).

This gap between interest and understanding must be closed, and there is much that employers can do to reduce it. With employees’ experience of benefits technology reported to be good, employers can capitalise on the growing interest in benefits to deliver more pension and benefit information online, and specifically to tablets and smartphones, enabling employees to have ‘anytime’ access to benefits information, in much the same way as they would expect to access their bank balance or emails.

Insights from Australia

Australia is a very large DC market, with total DC assets significantly in excess of almost all European markets. The Australian market has grappled with the issue of communication tools and channels for many years, and we think there is a lot that European markets can learn from Australia.

For example, a recent survey on investment trends advice showed that only 20% of Australians have ever accessed financial advice. Their experience was, generally, not positive.

• They rated the advice experience, on average, 5 out of 10.

• They found the written advice too long (the average Statement of Advice is 30 pages).

• 39% felt they did not have enough funds to make the financial advice worthwhile.

• Younger workers said they were likely or very likely to access advice online.

• Older workers tended to be the ones to access financial advice with an adviser; and the average age for those doing so was around 51.

• The 80% who had not accessed advice rated their financial expertise as 4 out of 10.

The findings in Australia are that financial advice is not very effective, and is not offering good value for employees. Our experience is that employees want guidance and education; but do not necessarily want formal advice.

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6 APPENDIX 1 – AON GLOBAL FINANCIAL WELLBEING SURVEY FINDINGS

Singapore: Retirement & Financial Wellbeing Survey for Singapore Employers (August 2015)

A recent Aon survey on trends and communications in Singapore provides a helpful perspective on countries with limited occupational provision. In Singapore, occupational and private pension provision remains underdeveloped, with employers currently playing a passive role in supporting and encouraging employees to save adequately to fund their retirement. However, moving forward, we are seeing more employers implementing financial wellbeing programs to help employees save adequately for their retirement. This allows employees to feel less stressed, be more engaged and productive. Many companies are also doing this in order to differentiate themselves, and increase their ability to attract and retain talent, and thus gain a sustainable business advantage.

• As Singapore’s population rapidly ages and life expectancy significantly increases, employers’ role in helping their workforce plan adequately for retirement by proactively facilitating retirement readiness, with the benefit of improving employee engagement, is coming under scrutiny.

• Our survey revealed that around half of participants consider their companies’ current retirement support to be ineffective in retaining and attracting the right employees.

Employers perceive that approximately 50% of employees that are not in the main Central Provident Fund, executives/high earners and those reaching retirement age are provided with ineffective retirement support.

• Singaporean employers are becoming increasingly aware that the current status quo is not sustainable. About 25% of employers in the survey are stepping up to assist their workforce by providing avenues for financial wellbeing. These company-wide programs and resources typically include encouraging more savings for retirement and financial goal setting, among others.

• In terms of effectiveness, Singapore employers find face-to-face individual discussions; online tools, and telephone helplines to be the most effective form of financial wellbeing programs.

However these are provided by few employers. The most popular form of financial wellbeing program is financial education (provided by 25% of employers); but only 25% of companies say these programs are effective. We have found that there is an inverse relationship between what companies offer and what is perceived as effective.

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7 APPENDIX 2 – INFOGRAPHICS

APPENDIX 2 – ADVANCING THE FINANCIAL WELLBEING OF EMPLOYEES Advancing the Financial Wellbeing of employees 60% 50%

56%

56%

40% 30%

of employers are very likely to focus on Financial Wellbeing in 2016. Up from 46% in 2015 and 30% in 2014.

30%

20% 10% 0%

2014

Why?

46% 2015

2016

How? Tools & Services Offered to Employees to Expand Financial Wellbeing.

85%

80%

of employers think it’s “the right thing to do”.

of employers want to improve employee engagement.

Health care education Savings for life events.

Budgeting Prioritising savings Debt management.

Basics of financial markets Financial planning.

89% of employers are likely to add or expand the financial wellbeing tools and services offered to employees.

Top 3 Tools Offered at the Beginning of 2016.

80%

of employers will likely communicate the link to employees.

Source: Aon Hewitt’s 2016 Hot Topics in Retirement and Financial Wellbeing 24

Basics of financial markets

Budgeting

Debt management

43%

34%

33%

7 APPENDIX 2 – INFOGRAPHICS

TOP QUESTIONS TO ASK WHEN PREPARING EMPLOYEES FOR FINANCIALLY SUCCESSFUL RETIREMENT How much do employees need to retire and maintain their standard of living?

Are today’s employees prepared to meet their needs at retirement?

11x An average of 11 times their final pay for an adequate age 65 retirement.

Only 1 out of 5 employees are projected to have retirement savings that exceed the amount needed at age 65.

When will employees be able to retire with adequate retirement resources?

How much should employees be saving for adequate retirement income?

The median employee is expected to be financially ready to retire at age 68.

On average, employees need to save 17% of each year’s pay, including contributions from the employer.

Source: Aon Hewitt: The Real Deal

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8 APPENDIX 3 – FURTHER READING

APPENDIX 3 - FURTHER READING 2015 Aon DC Survey – an overview of how over 300 DC scheme managers, trustees and sponsors are responding to pension freedom, auto-enrolment, and the need to deliver better member outcomes.

In a brave new pensions world what will DC members really want – Aon DC Member survey Aon Hewitt and Cass Business School.

The Real Deal: 2015 Retirement Income Adequacy at Large Companies – Aon Hewitt’s sixth instalment of The Real Deal Study analyses the financial retirement readiness of 2.1 million employees of 77 large U.S. employers.

2015 Trends & Experience in DC Plans Report – an overview of trends impacting US DC plans as employers undertake rigorous reviews to promote more participation, encourage greater savings, and improve investment funds.

2016 Hot Topics in Retirement and Financial Wellbeing – learn how employers are focusing more on helping workers gain a solid financial footing that goes beyond retirement.

Aon Hewitt Blog: Women and Super: Bridging the Superannuation Gender Gap in Australia The future of retirement income: Australian Superannuation Fund Association/State Street Global Advisors (March 2015) ANZ Women’s Report – Barriers to achieving financial gender equity (July 2015) Parliament of Australia: ‘A husband is not a retirement plan’ – Achieving economic security for women in retirement (April 2016) Barclays – Financial Wellbeing: The last taboo of the workplace?

International Longevity Centre – Europe’s Ageing Demography, ILC-UK 2014 EU Factpack Britain’s Broken Pensions: The 19 Things That Need To Change Now – The Daily Telegraph, May 20, 2016 Weighty New Conundrum For Pension Plan Sponsors – CFO, March 31, 2016 Should We Be Worried About Our Pensions? – BBC News, May 9, 2016 Time To Revolutionise Pensions And Let Staff Choose Their Auto-Enrol Scheme – Money Marketing, May 6, 2016

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