Addressing the Challenge of Global Ageing—Funding Issues

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Addressing the Challenge of Global Ageing—Funding Issues and Insurance Solutions
With the ageing of the population, LTC—for both employers and employees—is
becoming an issue of concern. As baby boomers reach age 50, many of them have to
deal with older parents while working. Providing LTC is time-consuming and employees
need to take time off work to deal with their dependent parents. A high proportion of
them are informal caregivers. The annual cost of LTC to employers can be substantial
as it can lead to absenteeism, workday interruption, costs associated with supervising
caregivers and replacement costs for employees who quit annually. In addition, providing
LTC can be very stressful and impact labour productivity. As an illustration, The MetLife
Caregiving Cost Study: Productivity Losses to U.S. Business (Metlife, 2006) found that
costs to U.S. employers through lost productivity based on caregivers employed full time
in the workplace are high. It amounts to US$17.1bn in lost productivity for employees
with intense caregiving responsibilities and to US$33.6bn in the total estimated costs
to employers for all full-time, employed caregivers. The average cost per employee for
those with intense caregiving responsibilities is US$2,441.
A second channel through which employers are impacted by global ageing is occupational
schemes. Occupational schemes are broadly classified into defined benefit (DB) schemes
and defined contributions (DC) schemes. A traditional DB plan is a plan in which the
benefit on retirement is determined by a set formula, rather than depending on investment
returns. In a DC plan, the amount of money that has to be contributed to the fund is
specified, while the benefit payout will be known only at the time of retirement. DB
schemes are facing serious financial problems as a result of, among other factors,
unforeseen increases in life expectancy. In addition, any asset shortfall arising from
poor investment returns on pension assets becomes a liability of the schemes’ sponsor.
This means that the investment risk and investment rewards are typically assumed by
the employer and not by the individual. Traditional defined benefit plan designs tend to
exhibit a J-shaped accrual pattern of benefits, where the present value of benefits grows
quite slowly early in an employee’s career and accelerates significantly in mid-career. In
other words, it costs more to fund the pension for older employees than for younger ones.
This explains why a lot of pension schemes confronted with the ageing of their employees
are moving from a DB scheme to a DC scheme. DC plans have become widespread all
over the world in recent years and are now the dominant form of plan in the private sector
in many countries.
6. Insurers’ exposure to ageing
Ageing will have various consequences for insurers since insurance companies as a
whole are an important employer and as such are confronted with both a shortage of the
labour force and an occupational schemes liability, as addressed before. In the EU alone,
they employ close to one million people (see Chapter 13 of this report for further details).
Insurers can also be influenced by the ageing of their clients through the risks they cover
and their underlying liability. An obvious case concerns the longevity risk which is the
risk that individuals live longer than anticipated. However, types of insurance contracts
other than the ones linked to pensions can be impacted by ageing. This could be the case
for auto insurance, as the risk of automobile accidents might be higher for people beyond
a certain age. In the same vein, health care risks are higher for older people. However,
if insurers are able to adjust their premiums with respect to age, premiums should cover
their increased liability due to ageing.