News, Reflections and Ideas

Introduction

We had intended to write another blog focused on micro issues but something about the large number of staff vacancies, reading stories about Broken Britain (nothing works) and the impending summer of discontent got us thinking about the causes, consequences and possible solutions of/to labour shortages. While there are many potential reasons for this – the great retirement, the great resignation, the great reflection, the great compression (what we are seeing is just the hangover from the Covid period stopping a lot of the natural labour flows), etc. – we have decided to focus on retirement. The available evidence suggests that Covid has accelerated the decision to retire for a great many people and unless we are able to get a grip on this, the consequences are likely to be severely negative for a lot of individuals, families, companies and society. These consequences are unlikely to be short-lived and could well embed themselves unless we start to recognise causes and solutions with some matter of urgency.

For this blog we have changed the format to reflect on retirement and retention under two separate headings. These will be followed by testing some consequent investment ideas at the end of the blog.

Retirement

Life has only a few really big decisions (though a few of the small ones will seem bigger than they truly are) – higher education, ‘choice of career’, life partnerships, having a family and then we have retirement (possibly the last big decision we have to face). Retirement is taken for a lot of reasons (tiredness, boredom, dissatisfaction, ill health, a promise of a new life, hobbies and life goals to fulfil, etc.) but as for so many of the big decisions, we take them with only a partial understanding of what we might expect and we often drift into the decision without too much, careful thought.

A lack of understanding of what retirement might mean for us is partially explained by it being a relatively recent phenomenon and the changing nature of life spans and associated health consequences. For most of the history of mankind there had no notion of retirement – we had to keep going to survive and as we became increasingly unable to support ourselves, our immediate family and community found ways to help us eke out an existence until we eventually succumbed to nature’s eventual call. Our working weeks became shorter and more sporadic but we had no notion of expecting to do nothing for many years before our eventual demise.

Retirement was ‘allowed’ by the relative efficiencies brought about by the industrial revolution – there was no need to work all the hours to put food on the table; having said that, the working hours remained long for many generations. Otto von Bismarck is seen as inventing the notion of retirement in 1889 to give the elderly and those suffering from invalidity some form of support from the state. Given a retirement age of 65 or 70, the remaining life span, historically, was very short indeed – a matter of a few years at best. This meant that the retirement system did not have to support for too long and the retiree did not have to think too hard about what to do with the remaining years. However, times have changed with a male life expectancy of 80 years and a female expectancy of 83 years in the UK. This changes the equation quite fundamentally from both wealth and health perspectives. Before we consider these, we need to think about what retirement now looks like for a lot of people.

We have been exposed to adverts which portray retirement as a glorified holiday - fit, silver-haired citizens are sharing a glass of wine, sailing together, walking along a beautiful beach with the sun going down in the distance, etc. Equally, it might be sharing activities in wonderfully appointed retirement villages. These are the images we are bombarded with – retirement is just another form of holiday. For those that have had a hard grind in a job they only tolerated, such images are appealing in the extreme – a move from ‘pain’ to pleasure. However, not surprisingly, such images are only partial at best.

Retirees come in many shapes but for the sake of this blog we classify them into the rare very wealthy, the almost as equally rare ‘well planned’ and the very common, ‘unplanned and far from wealthy’. For the first two groups, retirement is unlikely to severely dent their consumption and investment decisions – but even here, 10% inflation can start to cause concerns. Retirement for the last group can come as a shock and severely curtail life choices. Many in this group will have little or no savings and will have to depend on their pensions – the state pension will be insufficient for most apart from the very frugal. Another feature of retirement is that for a lot of people, it cannot be reversed and financial hardships will become a feature of life going forward. Only the very, small minority have the luxury of a new ‘retirement’ occupation.

In addition to retirement being costly to your wealth, there is increasing evidence that it can be very bad for health unless plans have been formed and developed. A google search on this topic will reveal that retirement, unless properly planned, has serious consequences for physical and mental health. There seems to be earlier mortality, higher risks of strokes/heart attacks, depression, the onset of dementia, etc. The two reasons for this state of affairs are the early onset of a sedentary lifestyle and the emotional stress of moving from a well defined active life to an unknown, uncertain one. This is not to say retirement is bad per se but it needs to be planned.

The primary thing we need to keep hold of is a sense of purpose – a reason to get out of bed in the morning. This can be achieved in many ways but the one we like is the 4s of retirement advocated by Neil Pasricha.

• Social – we are social creatures and we need to maintain as much of this to fill and fulfil our days.

• Structure – our days need structure, rather than just endless drifting

• Stimulation – we need to keep our brains as well as our bodies active. The two work together to help us move through our elderly years.

• Story – here we mean that our daily and weekly lives are sufficiently interesting and connected to create stories we can tell and treasure.

In summary, as for most things in life, it is better to have done some form of planning and reflection before diving into the deep, blue yonder.

Retention

The current labour market statistics are all over the place and it is not easy to pin down what is exactly happening at the moment. What we do know is that we have record vacancies, and low relative levels of unemployment and redundancy. We also know, in spite of the arguments forwarded in the previous section, that we have approx. 200,000 workers above trend over 55 that have retired from the UK workforce across the pandemic. One of the arguments behind this shift is that the workers gained a taste for not being in the workplace over the pandemic and they had sufficient savings to take retirement. We have a number of anecdotal examples of this type of thinking, added to by the notion that the pandemic and its consequences for families have led to the conclusion for many that life is just too short to waste the remaining years in a job that brings little enjoyment.

It is now being recognised, especially given the very tight job market, that the UK and companies cannot afford to keep on losing this mature talent and something has to change. Companies that are anti-ageist and anti-ableist are likely to fare a lot better in keeping staff of all hues that can contribute to adding value. We have all sat in organisations where being white and old is definitely a disadvantage – this occurs in all sectors including universities (in spite of what is claimed on web pages). The notions of diversity and equality seem to work against being inclusive to all workers – some agendas being more acceptable than others.

To help retain older staff companies will need to have an environment which is supportive of the changing needs of more elderly staff, being flexible to the day-to-day demands of health issues and committing to ongoing training, etc. Those companies that invest in the health and well-being of all staff will be ensuring their key assets have longevity and keep contributing to the success of the company. What is required here is more than just fancy web pages and HR banging on about the issues – it needs the whole of the management structure and the workforce to appreciate that value does not stop being produced once the age of 66 is reached. We need to return to the pre-industrial notion of work where staff are helped to mix their ability to work with their capacity to do so, and value is maintained, for all concerned, as long as possible. Quite simply, it is time to consign the industrial era notion of being thrown on the HR scrap heap once a specified age is reached – to its own scrap heap. Only then, will issues of the diminishing health and wealth of the nation and individuals begin to be tackled. In achieving this, companies have a key role to play – a role that benefits wider society as well as the bottom line.

Idea – Employee retention from the lens of employee training costs

There have been pioneering studies looking at the relationship between employee welfare and asset prices. For example, Edmans (2011) shows that a portfolio of the “100 Best Companies to Work For in America” earns a positive and significant Carhart alpha. And more recently, Boustanifar and Kang (2021) confirm that the findings still hold 10 years after its discovery and do well in both good and especially bad times. This suggests good employee welfare can serve as a protection mechanism for the downside. One of the challenges of applying such an idea is the availability of data. With the increasing interest in the Environment, Social and Governance (ESG) matrix, there is some level of disclosure about employee welfare but the history is limited. In this section, we illustrate the relevance of employee welfare through the employee training costs disclosure.

Specifically, we study companies that disclose their ‘employee training costs’ vs those that don’t in FTSE 350 companies. As of June 2022, we find only 16 companies that disclose. We then compare these companies’ performance with the FTSE350 index in the past 10 years. Only 13 of those 16 companies exist in 2012. We consider the focus on employee training as a signal of helping the employee to transition and adapt to their jobs which will lead to more likely retention.

Before we look at the findings, one important limitation needs to be noted. Because the disclose do not have historical value, we only observe those who disclosed in 2022. We use this as a proxy to indicate that those companies are likely to care more about their employees’ welfare. This is because the training costs are material enough or the management team consider it important enough to warrant a separate disclosure of their spending on employee training. This assumption is likely to be valid but we recognize this measure is imperfect and suffers from potential look-forward bias (as we use the information in 2022 to form a portfolio in 2021). The purpose is to illustrate the relevance of employee welfare to stock returns.

We can see that this portfolio of stocks with a relatively higher employee training focus has been outperforming its peers in the FTSE 350 index. The total return of this portfolio during the 10 years is 158% while the FTSE 350 index is 97%. The Sharpe ratio is also higher in this portfolio.