A] Prelude
For more information on pension systems, risk and coverage, feel free to visit our dedicated webpages:
https://expatpensionholland.nl/global-pillars-systems
https://expatpensionholland.nl/global-investments-risks-0
https://expatpensionholland.nl/global-social-security-coverage
For even more information feel free to visit the following external sites:
https://www.marshmclennan.com/insights/publications/2024/october/how-employers-can-address-future-retirement-risks.html
https://www.netspar.nl/wp-content/uploads/P20250108_DP001_Henkens.pdf
B] The Issue
A host of demographic and societal shifts — ranging from increased longevity of the workforce to challenges faced by younger generations in achieving financial milestones — have profound implications for how employers manage their talent and deliver financial and retirement benefits. With talent retention and workforce planning at center stage, employers can pursue several paths to help secure the retirement needs of their plan population while managing volatility through market cycles.
Diana Schneider, Head of Institutional Solutions at MassMutual, shares her perspective on the risks and opportunities emerging from U.S. demographic shifts and how MassMutual builds solutions for the evolving needs of its institutional clients.
C] What are key demographic shifts that could impact financial markets?
There are several trends shaping the overall demography of the U.S., the most significant of which is that the U.S. population is aging. People are living longer — and in addition, families are smaller, with people choosing to have fewer children. So we really are seeing a significantly higher proportion of older adults overall. In addition, we are seeing longer “healthspans,” an extension of the length of time people tend to be in good health.
All of these trends introduce complexities for employers, as it is changing the way that people work and approach retirement. As people live longer and healthier, we may see people choosing to work longer and delay retirement. We are also seeing more variety in the way people approach retirement — for instance, choosing a phased retirement in which they gradually transition from fulltime employment to retirement, and receive a portion of both their salary and retirement benefits in the meantime.
Some retirees are continuing to work, but in a less demanding role. Some may even take on a new career after retiring! We used to think about employees having three to five jobs over the course of their career. Now we think about them having three to five careers over the course of their working years.
D] Implications for employers
There are plenty of both, but let’s start with one risk that might be top of mind. If the average retirement age doesn’t increase, there will be a smaller proportion of the population of working age. That would likely create a talent shortage and intense competition to attract and retain the best employees. In that case, we might see employers focusing on offering best-in-class benefit packages and development and training opportunities in order to ensure they can attract and retain the right people.
On the other hand, if older people choose to extend their careers, employers have an opportunity to tap into that talent pool, which is likely to have a significant amount of industry expertise and institutional knowledge. Tools for retaining these employees might include phased retirement options or career change opportunities for older workers.
Either way, offering support for retirement planning will be key. As the population ages and 401(k) balances grow, we will see employees thinking about those balances differently — looking for coverage of a longer lifetime of financial needs. Employers need to make sure that they’re offering the right set of investment options to assist.
Employers will have other challenges as well, for example, figuring out what longer lifespans imply for managing pension plan risks, and making sure that they’re offering retirement planning tools to key talent.
“While demographic shifts have the potential to dramatically reshape portions of the economy and financial markets, they are predictable. Employers have an opportunity to think ahead and set themselves up for success.”
E] How to navigate these changes?
Employers, plan sponsors, and institutions should look for customizable solutions that help them manage the financial needs that evolve over time with demographic shifts.
Stable-value and other principal-guaranteed investments present a solution as 401(k) plan balances grow. When paired with growth assets, they can help retirees balance their growth objectives with more predictable returns and principal protection, which can be desirable as those assets need to stretch to meet broader needs.
Pension risk transfer is a helpful solution for plan sponsors that are concerned about the implications of longevity risk for their balance sheet. Corporate- and bank-owned life insurance, or COLI and BOLI, can be useful to employers that are looking for efficient ways to informally fund employee benefit plans.
F] The Solutions
Stable-value solutions have been a staple in the defined contribution space for many years. Stable value provides two things: principal preservation and stability in the yield that a participant receives over time. In periods of market volatility, it can be a helpful tool to stabilize returns. While retirees often seek growth, they are also looking for safety and predictability. That’s where stable value can come into play.
COLI and BOLI programs are often an efficient way for employers to informally fund benefit programs designed to attract and retain key employees. In these programs, the employer purchases permanent life insurance on consenting key employees and the policy values are used to offset the benefit liabilities.
Pension risk transfer is an arrangement whereby a plan sponsor purchases a group annuity from an insurance carrier and transfers its pension liability to that carrier. It’s a way for a plan sponsor to offload its pension liability — which could be large, and onerous and expensive to administer — to an insurance carrier that is well equipped to manage the risks associated with pension liabilities, like longevity risk. This allows plan sponsors to focus their time and attention back on what they do best — managing their core businesses.
G] How is MassMutual using technology and innovation?
We are seeing an increasing need for technological solutions to assist with retirement and retirement planning. Retirees are increasingly adopting new technologies — this was accelerated by COVID-era lockdowns, as many older adults leveraged new technologies to stay in touch with their families or arrange for home deliveries of prescriptions and groceries.
This change in retirees’ use of technology is putting pressure on financial institutions to ensure that they’re keeping pace with the demand for new applications and features. At MassMutual, it is a core belief that we should be easy to do business with, so we’ve focused on building the right technological tools.
H] Finally: How can employers best prepare?
I’ll point to three different strategies.
1] The first is to start planning for the long-term now. While demographic shifts have the potential to dramatically reshape portions of the economy and financial markets, they are predictable. In a world where so little is predictable, employers have an opportunity to think ahead and set themselves up for success.
2] The second is for employers to choose long-term partners that can help them navigate a new landscape. It is helpful to work with a provider with a proven long-term track-record and expertise in managing through these types of changes.
3] Lastly, employers should focus on both risks and opportunities inherent in these trends. These demographic shifts will introduce challenges, but there are opportunities for organizations that can adapt and recognize their strengths while leveraging outside partners that can enable them to achieve broader organizational goals.
As we navigate all of the short-term volatility in the economy and markets, employers and institutions shouldn’t lose track of the long-term changes that will shape the way we work, manage our finances, and retire.