The impact of ageing populations on companies is likely to be significant. The actions taken to address the issues may take many years to come into effect. It is an issue that needs to be considered now by human resources (HR) managers.
One of the factors is low birth rates which will mean that fewer people will be coming into the workforce. A draft report last year by the Productivity Commission stated that, in the next two years, the number of workers is projected to grow by about 320,000, but by 2024-25 it will take almost 20 years to achieve the same level of growth.
As we all know, people are also living longer and it is likely that this trend will continue. A respected geneticist from Cambridge University in the UK even believes that we will soon be able to live to 1,000, as science finds a cure for the physical deterioration of ageing.
If employees do not make any provision for retirement beyond the minimum 9 per cent superannuation guarantee, many of them will be hard pushed to retire at the age they want to and will probably opt to work longer.
When people start work, they normally do the more routine jobs, as they learn their trade. Then, as they progress through the organisation, they pass those jobs on to more junior people and take on the responsibilities of those above them. If we move into a world where there are few people following on behind, and those above are clinging onto their jobs later in life, this will have a profound impact on employee engagement. How many people in their 30s still want to be making the coffee?
One partial solution is to encourage people to retire. However, they will not if their superannuation is inadequate. There is also the issue that when markets are low companies will want to reduce their workforces, but it is also the time when superannuation balances are low. Research in the US over the period of sustained market falls a few years ago shows this. (see graph) HR policies will also need to adapt to a more flexible lifestyle.
All of this means that the current position, where companies don’t generally seek to differentiate themselves in super, is probably unsustainable. HR policies will need to encourage employees to save more, and a generally older workforce will focus more on super as part of their remuneration package. Furthermore, the ongoing move to a knowledge economy, where companies will be increasingly competing with each other for knowledge workers will exacerbate this. Companies probably won’t move back to defined benefit arrangements, but they might well consider adding bells and whistles (perhaps in the forms of guarantees where the risks can be hedged) to their accumulation arrangements. We have seen this happen elsewhere in the world.
From an HR point of view, the key is to understand the likely development of the workforce over time. We have carried out work where we have modelled this, using data on the profile of each individual employee and their ‘utility’ (which is a measure of the value they add to the organisation). We have modelled how the workforce will change over time with their current recruitment and retention policies, and test the effect of changes.
As an example of the conclusions that can be reached, we looked at a professional services organisation.
For years, the approach had been to recruit a large number of graduates, who worked as the ‘engine room’ producing the work. They would then progress into leading relationships with customers and business development. They had been experiencing sustained growth over a long period and our modelling showed that, if their growth rates declined, their model could fall over. With the low turnover they experienced — which is likely to continue if there is lower growth resulting in companies in their industry reducing recruitment levels — in a few years time they will end up unbalanced, with too many seniors, exacerbated by the ageing issue. They would have to take action to reduce their workforce at that time, or else hold people back (with the consequent lack of engagement and productivity). One solution was to look for other ways to carry out the ‘engine room’ work reducing the number of graduates who were looking for more senior roles, and to encourage senior people to branch out into other areas. This takes time.
We have also worked with clients on individual decision analysers, which can be used by HR to understand the financial consequences of decisions (for example retrenchment) in relation to individuals or groups of individuals.
Richard Block heads Hewitt Associates’ superannuation consulting practice in Australia and New Zealand
