Prof. Dr. Andries de Grip, Head of Research Employment and Training at the Research Centre for Education and the Labour Market (ROA) and Raymond Montizaan, researcher at ROA, have recently been awarded a Business Development and Knowledge Transfer Prize 2013* for their research on ‘Retirement expectations and older workers’ employability’.
In a written interview with Talkin’Business, Montizaan and de Grip explained the scope and findings of their research for various stakeholders and the recommendations that can be drawn for policy makers and employers.
What was the context of your research and what are its main focus points?
Retirement expectations have become a particularly relevant topic of research because the ageing of the population is challenging the sustainability of pension systems and has led to pension reforms in most industrialised countries. Moreover, in the context of the current economic and financial crisis, new pension reforms are planned in most European countries. Our project combines two lines of research.
The first research line focuses on how labour supply at older ages responds to changes in pension schemes, and how individuals form their retirement decisions in such a dynamic environment. For this purpose, we developed unique matched administrative-survey panels in collaboration with the Dutch pension funds APG. These panels enable us to analyse the effects of two pension reforms (abolishment of the FPU-pension rights and the postponement of AOW eligibility), and to identify the main mechanisms behind deviations between individual intentions and realisations.
In the second line of research, we investigate how human resource policies can affect employees’ pension awareness, their retirement intentions as well as their performance and employability. It is important to study how employers respond to the changes in pension schemes, and the extent to which HR-policies affect employees’ retirement decisions. For this purpose, we developed additional linked employer-employee panels that include detailed information on HR-policies applied by employers, organisation characteristics, as well as employees’ individual retirement preferences and intentions.
What are workers’ expectations about retirement? Do these expectations differ from reality?
Both retirement expectations and the actual timing of retirement have gradually increased in the last decade due to the pension reforms. Statistics Netherlands recently published figures showing that the retirement age in the Netherlands has increased to nearly 64, and that almost half of all retirees actually retire at or after age 65. When we compare this to the retirement behaviour in 2006, we observe that the actual retirement age has increased by almost 3 years in only 7 years time.
In our dataset, we find that retirement expectations have also increased substantially. Most employees expect to retire at age 65 or later. This implies that, on average, the retirement expectations of those who are not retired yet closely follow the trend in actual retirement behaviour. However, there are large differences between individual employees. There are still large groups of employees who are not capable to make a good estimate of the impact of all the pension reforms on their own retirement decisions and pension wealth.
What are the challenges facing older workers who are asked to work until a later age? How are they coping with these challenges and how can they cope with them better?
Pension reforms make early retirement more expensive for workers, and therefore force many employees to retire later. Many employees have difficulties to cope with these reforms. We observe lower job satisfaction and effort provision among those with retrenched pension rights. Moreover, individuals who were confronted with a drop in their pension wealth have significantly more mental health problems.
Our research shows that the degree to which employees are de-motivated strongly depends on their personality and work situation. Most interestingly, our results also indicate that individuals compare their situation with that of their colleagues: the negative impact of the reforms on the motivation of individual employees is strongly negatively affected by the number of colleagues who are not affected by the reform.
An important way to ensure that employees will be less de-motivated by future pension reforms is to develop reforms that entail a less discontinued rule between employees who remain entitled to the old pension rights and those who are faced with the new pension rules. In that case employees can compare themselves with colleagues who are better off as well as colleagues who are worse off.
Are older workers expected / able to make decisions about their employability and retirement?
The pension reforms in the Netherlands will lead to a significant drop in the pension wealth for younger generations. Employees will therefore have to invest in the third pillar of the pension system if they wish to retire earlier (through life course savings, private bank savings, etc.). Moreover, they face new choices that have been introduced in the pension system (such as part-time retirement). Therefore, they will feel that they have become ever more responsible for managing their own pension assets. All these trends imply that households will have to make increasingly sophisticated and all-too-often irreversible economic decisions related to their retirement.
It is problematic, however, that large groups of employees do not possess the basic financial knowledge to make these decisions. For example, we find that approximately 20% of all the Dutch public sector employees are financially illiterate. Moreover, our results indicate that, despite the lower pension wealth built up in the first and second pillars of the pension system, the percentage of employees who have additional savings for their pension substantially has declined between 2011 and 2013. We may therefore expect that large groups of employees will experience financial problems when they have to retire.
How do employers deal with the increase in retirement age? How can they better accommodate the needs of older workers?
There are several challenges which older workers face when they wish to retire at a later age. A fundamental challenge, however, is that employers are not willing to facilitate employees to work longer. Our results indicate that, on average, Dutch employers are extremely pessimistic about the productivity and the labour costs of older employees. A major consequence is that they are therefore also less willing to invest in the skills of older employees, which reinforces the problem.
The pessimism of employers about the productivity of their older employees is, however, not always justified. It may be true that employees suffer from cognitive decline with age, but they do also gain valuable on-the-job experience during their career. Furthermore, due to the fact that employees will retire at a later age, it will become more worthwhile for employers to invest in them because the delay in retirement increases the time that the benefits of human capital investments can be reaped. It would be worthwhile to stimulate employers to incorporate this in their cost-benefits analyses when deciding to retain older employees.
How can firms create an environment where workers are stimulated to work until a later age?
At the moment, we are developing field experiments to examine in more detail how HR-policies effectively can be used to stimulate employees to work longer. However, we do already have some results from analyses on the matched employer-employee surveys for the Dutch public sector that include detailed information on a wide range of HR-practices applied by employers, as well as individuals’ expected retirement age. We find that especially organisations’ training policies are significantly positively related to their employees’ expected retirement age and show that the provision of training strongly motivates employees, in particular those who do value a good treatment by their employer.
What are the main findings of your research? Were there any striking results?
The project has generated many interesting and relevant results. Among others, it is important to notice that the gains of the proposed pension reforms may be substantially smaller than projected, since not all workers adapt their retirement age as much as the reform aims at. Moreover, we show that pension reforms can adversely affect the mental health and effort provision of older workers. Our research project has documented strong psychological effects of these reforms and showed that employees do not always rationally react to a drop in their pension rights.
A second result is that employees are extremely sensitive with respect to the way pension funds communicate about their pension scheme. Older employees prefer to take less risk for their pensions than younger employees. However, a good explanation about the trade-off between risk, returns and the spread around the average expected return leads to a reversal of this pattern. The importance of a good explanation on how the pension system works is further emphasised by the high levels of financial illiteracy in certain sectors in the public sector (e.g., primary school teachers and policemen).
Finally, it is intriguing to observe that the effects of raising the eligibility age to the state old age pension strongly differ by gender. A man whose eligibility age for the statutory pension is increased by 2 years expects to retire on average only 6.9 months later than a man who is not affected by the reform, while a woman in a similar position expects to retire on average 17.4 months later than an unaffected woman. This provides an interesting puzzle for future research.
What are the main recommendations of your research?
We have made several recommendations to policy makers. The most important recommendation, as mentioned earlier, is that policy makers should take into account that strong discontinuities in pension rights between different age groups strongly demotivate employees. More gradual differences in pension rights can be used to ensure that employees do not feel badly treated. This recommendation was especially relevant in the debate on the postponement of the eligibility age of the state old age pension.
A second recommendation is that organisations should consider increasing their investments in training of older workers if they wish to maintain a highly productive and motivated older workforce. Training increases human skills and motivates employees. Moreover, the gains of training investments in older workers will increase because the postponement of the retirement age will increase the period during which the benefits of investments can be reaped. However, we also observe that especially small organisations seem to struggle to invest in their older employees. Policy makers should therefore pay extra attention to the question how human capital investment in older employees of smaller firms can be stimulated. A further concern that should be addressed is that Dutch employers are too pessimistic about the productivity of older workers.
Thirdly, we observe that employees’ economic preferences shift when they receive better information on the long run trade-off between the risks taken in investment strategies for retirement and the returns of these investments. We therefore suggest that extra attention should be paid to explain how the pension system works. Most importantly, the fact that a large group of employees is financially illiterate emphasises the urgent need that pension funds should differentiate their communication to the ability to deal with complex financial matters of their customers.
What is the value of this type of study for Dutch policy makers? What kind of impact could it have?
This research project contributes to solving important economic and social challenges by advancing our knowledge on the dynamic effects of pension reforms on retirement intentions as well as private investments related to retirement. No studies exist, to our knowledge, that analyse the effect of pension reforms on various potential responses such as postponing retirement expectations and the actual retirement decision, additional savings and/or accepting a lower pension benefit in an integrated framework in which both employee and employer perspectives are incorporated. Moreover, the project adds to our knowledge on the extent to which retirement expectations and actual retirement behaviour of individuals with different economic preferences, financial skills and personality characteristics are affected by pension reforms.
It is extremely relevant to identify the groups of workers with incorrect expectations about their pension rights. Overly optimistic beliefs about pension rights expectations may lead to under-saving, and subsequently impair the well-being of vulnerable groups in society. Furthermore, our project helps policy makers and HR managers to design more efficient institutional arrangements and HR-practices to stimulate prolonged labour force participation at high levels of productivity. Improving the employability and vitality of older workers is clearly welfare improving since pension reforms force workers to postpone their retirement irrespective of their productivity in the workplace. Evidence-based knowledge on the effectiveness of HR-tools is therefore highly relevant for all parties involved (employees, employers, pension funds and the government) as these practices are costly while the necessity increases to maintain the performance of older workers who are incentivised to postpone their retirement by the recent pension reforms.
Is this specific study part of a larger research project with ROA? (for example, on the employability of older workers in general)
This project continues the research of the PhD thesis of Raymond Montizaan and a research project on active ageing which was conducted in 2005 in cooperation with ABP. A major advantage of this continuation, is that it enables us follow the behaviour of individuals who were confronted by a major pension reform in 2006 (abolishment of the FPU pensions) until these cohorts actually retire. Moreover, our project is related to the current PhD study of Nicolás Salamanca who focuses on behavioural aspects of investment in human and financial capital.
Why was your study awarded with the BDKT Prize 2013? What made it stick out in the jury’s opinion? What is its importance and what are its potential impact/repercussions?
We think that several factors may have contributed to our study being awarded the BDKT prize.. First, the high social relevance of our project.As our society is strongly ageing, major concerns are raised about the financial sustainability of the Dutch pension system., There have been substantial reforms of the pension system in the past decades and policy makers are still debating how the pension system should be further reformed in the coming years.
A second reason is that our project is well embedded in the field. The Dutch public sector’s pension fund APG provided extensive support to our research project and actively used our results in their communication activities to their customers and policy makers. Furthermore, we secured substantial grants and subsidies of the GAK Foundation and the Ministry of Social Affairs and Employment to develop our databases. Finally, we recently received a Netspar grant which will enable us to continue our research project in the coming years, and to extend our analyses to others sectors in close cooperation with PGGM and ActuIT.
Last but not least, the use of natural and field experiments helps us to make causal claims on how pension reforms and HR-instrument can affect important labour outcomes and human behaviour and motivation. The results of our project were published in reports and actively presented to policy makers, Moreover the results are published in high-ranked scientific journals. This project therefore provides a good bridge between scientific and more policy orientated research.
*About the Business Development and Knowledge Transfer Prize
The Business Development and Knowledge Transfer Prize is awarded to the Maastricht University School of Business and Economic academic(s) who have presented their research to the general public through various media channels focusing on “a way in which scientific knowledge is made available to our society in a form in which it can be applied to positively affect current societal needs or challenges and subsequently create economic and/or societal value.”
The jury of the Business Development and Knowledge Transfer Prize 2013 comprised of the following persons:
Luc Soete, Rector Magnificus Maastricht University
Edward Peters, Managing Director Maastricht University School of Business and Economics
Hein Schreuder, former Executive VP Corporate Strategy and Acquisitions Royal DSM and former Honorary Professor Maastricht University School of Business and Economics
Wim Weijnen, Director Limburg Employers Association (LWV)