The funding of pension plans remains problematic for many employers, and on June 17 the federal government named well-known attorney and mediation maven Kenneth Feinberg to supervise a new program that allows some pension funds to cut retiree benefits.
Standard & Poor’s released a report June 18 saying that public pensions are in a state of transition as some states and municipalities have enacted reforms to address shortfalls while others lag behind.
Despite the continued attention on public and private retirement plans, lucrative law firm pensions afforded to retired equity partners have largely been overlooked. But with annual benefits at a minimum of $250,000 per year, these plans face funding problems that affect benefit levels as well as impact on younger partners.
“Most firms don’t want to advertise that they have problems,” Bud Schiff, a managing director and CEO of Alvarez & Marsal Executive Compensation and Benefits, explained in a telephone interview Monday. “But every law firm is a microcosm of the burdens that Social Security faces,” he added, referring to the longstanding intractable financial issues the federal system has faced.
The problems, he said, stem from a confluence of factors. Firms with mandatory retirement are requiring partners to relinquish their status as young as 60, even though productivity and longevity can often extend long beyond that age.
In addition, the number of equity partners whose current earnings fund a significant portion of retirement benefits has at best remained static and at some firms has dropped. As a result, the ratio of active to retired partners has plummeted, so fewer partners are funding the growing number of those no longer bringing in fees for their firms.
Many firms, he said, “don’t have any real money aside.”
Schiff says that as a result, firms are taking steps to mitigate their obligations. Some are quietly revising their plans by capping future payouts as a percentage of the firm’s total distributable income or by phasing out the plans for younger partners altogether, a move Schiff says is called “freezing the plan.”
And, like their corporate counterparts, Schiff said, some firms are also establishing separate “sinking funds” to set aside money so that benefits don’t affect current income.
While some firms, he said, “are saying they don’t have a burden, even the largest and most successful firms” know they need to address the concerns.
After all, Schiff said, when “younger partners see that 10 percent of the firm’s total distributable income is allocated for retirement benefits, it’s like working for 90 percent on the dollar.”