As of late, discussions on demographic changes, including the impact on the Social Security system, have caused people to become generally more aware of the phenomenon of an “aging society.” The focus many companies place on seeking young talent, which for a long time was believed to lead to greater innovation, agility, flexibility in the workplace and, to a greater extent, performance, is increasingly subject to question. Many companies have since shifted their focus. The focus on young employees has been replaced by the acknowledgment that a company is better positioned if it has a “healthy” balance between younger and older employees. As a consequence, companies will need to create an environment that provides the same opportunities to older as to younger employees.
Older Em ployees Ar e Back in the Workforc e
Companies are exploring opportunities to attract those employees who, in the past, discontinued their careers due to family commitments. This new trend was triggered by a summit of the European Council several years ago, when Europe’s leaders declared their political goal was to increase the ratio of older employees in active employment. This shift was necessary not only to cope with the future economic challenges for Europe’s Social Security and welfare systems resulting from an “aging society,” but also to respond to a foreseen shortage of qualified employees in various labor markets in Western Europe. Germany’s increasing of its mandatory retirement age was just one logical consequence.
Response to an Older and “Nontraditional” Workforc e
Companies will now need to consider what changes they must introduce as the result of having a more diversified workforce, in terms of age or in terms of employment relationship.
This requires a higher awareness of the needs of the different stakeholder groups and the competence to resolve potential conflicts through innovative solutions. In addition, companies need to consider the requirements imposed by nontraditional employment relationships.
Nontraditional employment relationships are those that deviate from common practice (e.g., careers with fluctuating part-time schedules, lateral careers, employees joining the company later in their careers, phased-in retirement concepts, and contracts with interim project managers).
As a first step, companies should review their HR strategies in light of the changed framework in terms of demographics, longer life expectancies, new working-time rules, Germany’s General Equal Treatment Act, etc., and adapt those strategies to the extent necessary. Subsequently, individual HR programs (e.g., mandatory retirement at the age of 65, personnel development) should be revised to be in line with revised HR strategies. In this context, the potential effects of the increase of retirement ages on the Social Security system should be considered. Despite long transition periods, this topic needs to be discussed in a timely manner to give employees sufficient time to prepare themselves for the upcoming changes and to assist them, to the extent requested, with their planning.
Companies that see their opportunities in diversifying their workforce will offer an extended career in accordance with the new retirement ages. This will enable them to better cope with a high demand for qualified personnel, which may not be satisfied in the future solely by relying on the domestic labor market. Often the employment relationship during the two additional years prior to retirement will be structured differently from the rest of the earlier career. It is quite likely that employees may wish to begin with a phased-in retirement, such as part-time or project-based employment.
For other companies (e.g., production, but also certain field service activities), an extended career may not be an option for either the company or the employee. Solutions should be explored that allow the employees to retire, from a financial perspective, at the current retirement age despite the decrease in pensions as a result of the “early” retirement. Employers also need to keep in mind that such employees will no longer be able to reap the benefits of being statutory senior part-time employees.
Older Em ployees and Company Pension Plans
Special attention should be given to the retirement age as defined in the company pension plan. The retirement age determines not only the date as of which a pension is paid, but also the amount of the pension, meaning company pensions can be used as a strategic HR tool to influence an employee’s retirement behavior.
Of course, age is an important element that can significantly impact pension costs and risks. As a consequence, many company pension plans exclude certain employee groups based on age-related criteria. This may now conflict with the new HR strategy that is designed for a more diversified workforce, including more senior employees.
Pension costs and risks may be controlled other than merely by excluding specific employees from a pension plan based on their age. For instance, benefit risks could be transferred to an insurance company. The benefit formula could be revised by reflecting the higher costs resulting from longer survivor pensions for young spouses or by using other methods of benefit payments, e.g., lump-sum capital instead of an annuity.
The General Equal Tr eatment Ac t and Company
According to the current prevailing opinion, the General Equal Treatment Act applies also to company pension plans. Thus, pension design options will need to comply with the new legal framework. This means an entirely new way of thinking, as equal treatment issues in the past were primarily questions of discrimination based on sex. In Germany, different treatment based on age has been discussed only within the context of sex discrimination (with respect to vesting requirements, as it was argued that this will adversely affect women more so than men).
Company pension plans in particular may be impacted by such changes, as they usually apply to an employee’s entire career and are financed by the company. Thus, the key question is how the employees’ and company’s trust is protected under the new law. Regarding company pension plans, the General Equal Treatment Act does not regulate to what extent this new law applies to past services and promises made prior to the enactment of the General Equal Treatment Act. Also, clarification is needed as to what extent preservation of rights must be considered when amendments to company pension plans are made.
The Federal Labor Court provides some guidance as to its current stance on how to resolve such issues. Past experience within the context of the harmonization of retirement ages of men and women has demonstrated the complexity of company pension plan issues. However, it has also been shown that companies that have adapted their benefit plans in a timely manner in response to the new legal picture could successfully avoid additional costs.
The increase of the retirement ages in the German Social Security system and the General Equal Treatment Act should be seen as an opportunity to adapt the regulations of the existing HR programs (including company pension plans) to the requirements deriving from a revised HR strategy and the new legal regulations.