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Spending the savings – Decumulation and middle-income retirement

Concern about New Zealand’s ageing population has resulted in policy developments, such as KiwiSaver, to help people accumulate savings and in turn, provide for their ever increasing expected length of time in retirement. But what do people do with their accumulated lump-sums once they reach 65?

A recent symposium on decumulation and middle-income retirement hosted by the Retirement Policy and Research Centre (RPRC) with help from the Commission for Financial Literacy and Retirement Incomes, focused on the urgent question: “How can middle-income retirees best use their savings for what might be a very long or very short retirement, either in good health or when needing periods of expensive long-term care?”

According to the RPRC, the purpose of the symposium was to have some input into the Retirement Commission Review 2013 on decumulation and to provide some clear direction on what needs to happen next. The specific issues covered included, “the incoherence of current policy, middle-income insecurity, equity matters and the economics of decumulation”.

A focus on the way accumulated wealth is spent in retirement or decumulated is extremely important in light of the fact that populations are ageing globally as fertility rates fall and longevity improves. This demographic change is exerting pressure on the labour market, health, pension and retirement policies. By mid-century a more than quadrupling of the numbers aged over 85 years will dramatically increase the demand for in-home and residential long-term care. “Finding solutions to the issue of decumulation is pressing. Older citizens with access to products that help them to run down their accumulated assets over the later part of their retirement can potentially manage what might be catastrophic care costs” says Greg Lee, Head of Actuarial and Investment Consulting at Aon Hewitt.

However in New Zealand, there has been little discussion on how public policies could assist the decumulation phase of retirement through the provision of products that recognise the fiscal risks of ageing. While KiwiSaver will become increasingly important in accumulating wealth for retirement, without thorough thought to the way it is decumulated through retirement, retirees may be ill prepared for a potentially long, expensive retirement. “There are virtually no products, such as annuities, available to support New Zealand Superannuation in reducing the risk of outliving capital. Nor has the market for home-equity release products or Long-Term Care Insurance developed significantly” says Lee.

In summing up the symposium the RPRC concluded that “the issues require an understanding of demographic, attitudinal and economic aspects of the lifetime wellbeing of each individual, and uncertainty in these issues is reflected in an unwillingness to take on the risk associated with the exchanges of assets over a long duration, without unreasonable impacts on price or conditions of exchange”.

While it was agreed significant progress was made at the symposium, the multifaceted dimensions of decumulation make it a complex issue. Representatives from all the interested sectors: care-providers, bankers, academics, fund managers and interested members of the general public to Treasury, IRD and the Ministry of Social Development - are concerned that an equitable solution is found.

For more information contact Greg Lee on +64 9 362 9825 or email [email protected].

Communication is Key - Effectively communicating your Total Rewards Program

Many business leaders and HR professionals are keen to more effectively utilise total rewards as a management tool. They recognise that total rewards directly impacts employee engagement and performance, especially in today’s environment of changing employee values, evolving life stages and increasing diversity.

In Aon Hewitt’s 2012 New Zealand HR Policy and Practice Report¹ local participants agreed that providing a total rewards programme assists employee engagement, positive performance and low attrition rates. Opinion was firmly split however, as to whether employees fully appreciate or understand the real value of the reward programmes offered. The primary reason given for employees not appreciating the value of the reward programme was a lack of communication and, interestingly, 80% of all participants believed that their managers needed more support to communicate rewards to their teams (Aon Hewitt, 2012).

Despite these challenges, many companies recognise that sound execution of total rewards communication is crucial. “Employees who understand the true value of their total rewards are more likely to appreciate the investment their employer is making in them, to stay with the company, and to deliver business results” says Simon Rudd, Talent & Reward head at Aon Hewitt. “Consequently, many leading companies are acutely aware that they need to communicate more effectively and personally with their employees. They also understand that such communication will also attract more talented people to join their organisation, perform at levels yielding better outcomes, and stay committed to the organisation” says Rudd.

Aon Hewitt research however, highlights that much more needs to be done by organisations when it comes to communicating Total Rewards. The Aon Hewitt survey on Total Rewards Communication in Asia Pacific² revealed that only half of companies surveyed had clearly defined their total rewards programmes. In fact, about 80% do not even have a specific communication plan. Locally here in New Zealand, although half of organisations in the HR Policy and Practice Report New Zealand review their reward strategies annually, half of these review their reward communication a mere once every four years (Aon Hewitt, 2012).

Given the array of workplace rewards as well as the individuality of each employee’s preferences, it is understandable that companies struggle to position their total rewards messages appropriately. However without clearly defined total rewards programmes companies and employees miss out. Organisations fail to leverage the benefits of an engaged workforce that fully understand and appreciate their total reward package.

For more information contact Simon Rudd +64 9 3629291 or email [email protected].

1. Aon Hewitt New Zealand Policy and Practice Report, November 2012
2. Aon Hewitt’s Total Rewards Communication Survey in Asia Pacific, 2012

The end of the traditional career path

Career expectations have changed dramatically in the last decade. Jobs tend to be more project-based, employees demand more flexible arrangements and people move in and out of the workforce with increased fluidity. At the same time, many organisations are confronted with the challenge of organisational restructures, cost reductions and large-scale change programs - resulting in flat structures, limited resources and fewer traditional vertical promotions.

Despite these challenges many organisations still rely on traditional ladder-based career development paths, even though their organisational models may no longer support them. Furthermore, many employees' perceptions of career growth are still aligned with the 'upward promotion' line of thinking.

Aon Hewitt's 2012 Best Employer research confirmed that 75% of organisations recognise Career Opportunities as one of the top ways to improve employee engagement and workforce performance. So how can organisations ensure that employee expectations are aligned with realistic career development paths?

Aon Hewitt's Best Employers manage careers better through:

• People managers
  Managers at Best Employer organisations take responsibility for the development and growth of their team members. 71% of employees report that their direct manager helps them find ways to grow in the job, compared to 49% of employees in the other organisations.
• HR processes and systems
  Best Employer organisations utilise HR processes and systems that support the management of career opportunities. 68% of employees in Best Employer organisations believe there are sufficient opportunities for employees to progress their careers beyond promotion (e.g. lateral movement, secondments, project work), compared to 41% of employees in the other organisations.

In times when cost cutting and redundancies are commonplace, employees understand that career opportunities in the traditional sense are less achievable. However, in structuring and communicating career paths employers should consider that regardless of external factors, career is always a priority and key motivator for employees.

For more information contact Alison Hall on +64 9 362 9292 or email [email protected].

Measurement key to people risk management

The relationship between human resource (HR) management and business risk is becoming increasingly entwined. Yet despite the increasing importance of 'people risk management', many employers are yet to fully grasp this.

Janet Hayden, Aon Hewitt General Manager, believes that identifying the cost inputs and risks of employing people can drive improvements to productivity and profitability. "The employment relationship is based on the expectation that workers will come to work and be productive in return for remuneration and benefits. Both parties have an obligation to one another as productivity supports growth and profit," says Hayden. "Yet the risk of this paradigm breaking down or not operating to the norm is often unmeasured, generally because the data is not captured in a form that is measurable".

Most organisations acknowledge that people are their greatest asset. However, they often fail to recognise that risks associated with employing people, such as disengagement, stress or injury, can severely impact their productivity and profitability. "People risk management is about managing the risks associated with employing people and the contexts within which their work is carried out," says Hayden.

Many organisations closely align the concept of people risk with OHS practices and insurances such as workers' compensation and income protection. Aon Hewitt believes that holistic people risk management should not be confined to work health and safety matters. "Relying on a stringent set of rules and a regulatory governance process is not an effective way for employers to manage risk" says Hayden. Many unrecognised factors contribute to productivity and profit drain including poor workforce planning, employee engagement, talent management and leadership practices.

Aon Hewitt Australasia is championing a new measure which identifies and quantifies internal risk costs (including hidden costs) called Total Cost of People Risk (TCOPR). TCOPR links costs with business and productivity measures to create a link between people risk, cost and business profitability.

For more information contact Janet Hayden on +64 9 362 9822 or email [email protected].