In with the old

When the American writer W B Pitkin coined the phrase ‘life begins at 40’ in his book with the same title in 1932, he didn’t mean it literally. However, in some ways now it seems to be becoming true.

According to an article in medical journal The Lancet last October, if the trend in developed countries over the last two centuries continues, half of babies born since 2000 in countries such as the UK, France, Germany, Italy, Japan and the USA will live to 100. On their 40th birthday, therefore, they will still have another 60 years ahead of them – or, to put it another way, around the average life expectancy in 1930s America.

As The Lancet researchers noted, the increase in longevity has been “one of the most important accomplishments of the 20th century”. It might also end up being one of the biggest problems of the 21st.

The difficulty, of course, is that rising life expectancy has been matched in almost every industrialized country by an equally impressive decline in the birth rate, and the cumulative effect is stark. Overall, by 2050 more than a quarter of the population in Organisation for Economic Co-operation and Development countries will be 65 years or older, compared with slightly less than 15% today.

“This is going to be a very big problem for most developed regions,” says Vedrana Miljak, project manager at econsense Forum for Sustainable Development of German Business. The forum runs Laboratory Demographic Change, a think-tank that brings large corporations together to tackle the strategic challenges of demographic development. Much of the discussion to date, of course, has centred on public policy, mainly considering the strain on state pensions and social security provision. However, the implications for the private sector are equally serious.

Workplace worries

For a start, businesses have pensions of their own, and the change away from final salary or defined benefit schemes in recent years in the UK and other countries that have them, such as Holland and Ireland, is partly a reflection of increased liabilities due to longevity; likewise with other benefits. At HR and benefits specialists Buck Consultants, principal Jon Green says some of its clients still have legacy contracts with staff guaranteeing medical benefits for life. For one company, the oldest individual covered is now 98. “It can become prohibitively expensive,” he warns.

However, the biggest long-term risk for employers is the possibility of labour shortages in coming years as the workforce shrinks. The working age population in the EU (defined as 15 to 64) increased by 4% between 1990 and 2004. However, from 2004 to 2030 it is forecast to decrease by 7%, according to another German institute, the Rostock Center for the Study of Demographic Change.

Look more closely and the changes in the make-up of the workplace in future also become apparent.

Throughout Europe, all age groups up to the age of around 45 are shrinking at double-digit rates. In Germany, the number of 35 to 44-year-olds in the workplace, for example, is expected to shrink by 28%.

It is, points out Dr Thusnelda Tivig at the Rostock Center, a significant demographic shift, and yet there has been relatively little work done by most businesses in addressing the issue. “We’ve been surprised to find that even large companies fail to consider the question of availability,” Tivig remarks. Locations are often chosen, for instance, without any regard as to whether there will be a labour supply in the region 20 years down the road.

Likewise, moves towards keeping employees on post-retirement, which will become increasingly necessary, have been limited in the EU – a fact reflected in the available statistics. In Japan, detailed data is available for employment figures at every age. In Europe, the records stop at age 74. The reason? “There are so few in work that it would be meaningless,” Tivig explains.

A mixed picture

It would be wrong to say that ageing is an issue that has had no thought, however. When Ernst & Young surveyed more than 100 experts and academics across 11 sectors a couple of years ago, to identify the top 10 strategic risks recognised by businesses, the ageing workforce and consumers came in at number three. Furthermore, in the list of emerging risks they thought likely to make the top 10 in three years’ time, the war for talent was number one.

When it comes to action to address it, however, there’s less to report. As David DeLong, author of Lost Knowledge: Confronting the Threat of an Ageing Workforce, puts it, there is something of a “knowing, doing gap”.

Of course, there are examples of companies that have done significant work. DeLong cites Nordic financial services group Nordea. Like many European employers throughout the 1990s, it encouraged older workers to retire early. However, when executives realised the Finnish workforce, where it is a dominant player, was ageing faster than any other country, it dramatically reversed this in 2003, launching mentoring, training and healthcare initiatives to retain workers as long as possible. BASF (see box, right) is another example. However, such companies remain in a minority.

At research group The Conference Board in the USA, strategic workforce planning specialist Mary B Young has been looking at the relationship of an ageing workforce to enterprise risk management.

She has been surprised by how few risk managers even mention human capital risk. “That’s despite the fact that labour typically accounts for more than half a company’s operating costs,” she notes. There First, ageing is not actually a problem everywhere. The demographic risk atlas produced by econsense and the Rostock Center, for instance, shows that while most regions in the developed world face challenges, there are pockets, mostly around major cities, where there is less of an issue.

More generally, the concern is principally about skilled and specialist labour; those needing unskilled labour will face less of an issue. The problem is what DeLong describes as “an exodus of talent” in knowledge-intensive industries as baby boomers over the next 10 to 20 years take their skills and leadership with them into retirement. “The challenge of an ageing workforce is a knowledge shortage, not a labour shortage,” he says.

Furthermore, those that do have a problem face considerable challenges in addressing it. For a start, there remains significant opposition among employees to the idea of working later in life. A survey of 7,279 European employees by Aon in April showed that 29% opposed increasing the retirement age. That’s hardly surprising, given that many European countries with high levels of structural unemployment have spent the last couple of decades encouraging early retirement, while traditionally offering generous public pensions as well. “Europeans have been culturally conditioned to retiring reasonably early,” DeLong says.

The law doesn’t necessarily help either. In Japan, for instance, the legal framework allows companies to move workers at retirement age onto lower-paid roles, often even doing the same job. It is very different to the USA or EU. “In the USA, you cannot even have a discussion using the words ‘age’ or ‘birthday’,” remarks Bob Charles, leader for Towers Watson Asia-Pacific, and author of the firm’s ‘Ageing Workforce’ study for the region. That is important because many look to Japan as a template. Tivig, for example, argues that companies in Europe need to have similar flexibility if they are to take on and retain greater numbers of older workers. At the moment, seniority wages (younger workers being paid less and older workers more than their productivity justifies) acts as a barrier.

“It’s not just about the increasing scarcity of younger workers,” she maintains. “Companies will only really be ready to employ older people if we manage to have an open discussion on costs. In this context at least, Japan is showing us the way”.

A long way to go

However, it is probably possible to overstate how advanced Japan is in dealing with the challenges.

As Charles says, the legal position may be clear enough, but the reality is somewhat different, and there remain significant cultural challenges. In Japan, as in Europe, workers generally retire at the high point of their career. However, increasingly they will do so on the Friday only to come back in on Monday on reduced pay, at a lower position and reporting to someone 10 years younger. “Certainly there are some cases where that goes smoothly,” Charles says. “Equally, there are plenty of examples where it doesn’t.” Japan is still very much working through the issues.

Europe is further behind because the problem still lacks urgency. That’s because for most companies it remains poorly defined. Young likens it to waking up in the morning in France and switching on a Europe wide weather report to help determine what to wear.

“That’s the problem with demographic projections for countries or industries; they’re too general.”

Companies need to know how demographic changes are going to affect their particular region, right down to their impact on particular functions within the firm, in order to motivate them. It means taking the demographic data but also analysing the historical trends in their own data to project when people are likely to retire and who will be in the workforce in future. Most, however, still don’t do it.

Furthermore, it is fundamentally a long-term issue; the World Economic Forum’s ‘Global Risks’ report earlier this year included demographic change in its list of “creeping risk” – slow failures that, while threatening significant impacts, are easy to ignore because of their lack of immediacy.

Demographic change will have huge implications for companies, but they will only emerge gradually.

Indeed, the reason Germany is slightly ahead of most European countries, BASF head of HR strategy Dr Hartmut Lang suggests, is that its demographic problem is more noticeable because its population is already shrinking. That’s also true – and more so – for Japan. Elsewhere, it is still easy to put off dealing with it. Vicky Short, operations director at HR solutions provider Randstad, points out: “Companies only tend to ask the question once they’re struggling to recruit.”

In truth, there may not be too much wrong with that approach. There are always some employers that like to be at the leading edge and others that prefer to follow, says Oliver Rowlands, head of retirement for EMEA at Aon Consulting. For many companies, a delay may be fine. “You probably won’t lose out too much by following the trend,” he says.

However, there are three reasons companies should perhaps think about it now. First, because not all the changes are that long-term in terms of their horizons. In just the next five years, for example, the number of 64 to 69-year-olds in the UK is expected to rise by more than 600,000 – up 20%.

Secondly, companies’ ability to adapt will vary significantly, and it’s probably those that have done least to address the issue that will face the greatest challenge. Miljak points out that the companies involved in the Laboratory are all big businesses, most of them global players. Not only can they offer the most attractive incentives for the young European workers that do remain, they also have significant flexibility if they are struggling to recruit.

“The problems they are facing in Europe in terms of demographic change aren’t present to the same extent in other markets they’re involved in, such as India,” Miljak says. “They can shift if they have to.” Smaller players won’t have that option.

Finally, as Rowlands points out, companies will have to deal with the issue sooner or later. “The more enlightened employers recognise that it’s not really a risk, as such. It is an inevitability,” he says.

While companies might not lose out by leaving it another few years to address the issue, there’s likely to be a competitive advantage in starting sooner rather than later – however long you plan to be around.