If older employees can’t afford to retire, what happens? Chances are if they’re healthy, they’ll continue to work. These employees, or hidden pensioners, will be a serious cost to businesses in the future, according to a report by Watson Wyatt.

Businesses, then, should heed the following three risks, which, if not addressed in the years ahead, will lead to hidden pensioners lurking on their payrolls.

First, if employees cannot get 70% of their pre-retirement income, then they are forced to work longer or live on less. Defined contribution(DC)plans may be able to provide this 70% replacement ratio in certain cases. However, without careful thought in designing the plan, employers may have unproductive, frustrated or even hostile employees who can’t afford to retire at their workplace.

Second, it’s difficult to foresee what a DC plan will yield for a retiree. An employee’s decision to retire may depend on fluctuations in the market. They might continue to work if the market is down and retire when the market’s up. The pension industry offers an answer to this volatility: “target-date retirement funds with guarantees.”

Although not used across the whole industry as yet, these funds allow the employee to set their retirement date. And, at the cost of a minimal fee or trading off part of a return, the employee can cash in on a stock’s highest value over the course of the investment. This reduces the risk associated with a low market on any given day.

Finally, DC plans do not address the fact that we’re now living longer. Until plans can address this, members should be prepared to factor in longevity when considering their pensions. They may purchase an annuity, take on part-time work or cut back on lifestyle&#8212or they may have to rely on support from the government and/or their family. But plan sponsors should continue to educate their members about saving for retirement.

To comment on this story email brooke.smith@rci.rogers.com.

Copyright © 2019 Transcontinental Media G.P. Originally published on benefitscanada.com

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