Phased retirement offers option to retain firm knowledge

April 2007 » Business Briefs
More companies will be able to use phased retirement to retain valuable skills and knowledge while providing mature workers with an alternative to the all-or-nothing approach to retirement, according to a report by The Conference Board, a global research and business membership organization. As a result of the newly passed Pension Protection Act of 2006, employers may now pay pension benefits to employees age 62 and older who are covered under a defined-benefit pension plan, even if they continue to work. "Even though IRS regulations for implementing the Pension Protection Act have yet to be defined, the new law helps to make phased retirement a viable option for employers who want to capitalize on mature talent," say The Conference Board report authors Anna M. Rappaport and Mary B. Young. "As the U.S. workforce grows older and life expectancy continues to rise, the play book for retirement is being rewritten."

More companies will be able to use phased retirement to retain valuable skills and knowledge while providing mature workers with an alternative to the all-or-nothing approach to retirement, according to a report by The Conference Board, a global research and business membership organization. As a result of the newly passed Pension Protection Act of 2006, employers may now pay pension benefits to employees age 62 and older who are covered under a defined-benefit pension plan, even if they continue to work.

"Even though IRS regulations for implementing the Pension Protection Act have yet to be defined, the new law helps to make phased retirement a viable option for employers who want to capitalize on mature talent," say The Conference Board report authors Anna M. Rappaport and Mary B. Young. "As the U.S. workforce grows older and life expectancy continues to rise, the play book for retirement is being rewritten."

There is no universal definition of phased retirement, whether formal (part of an organization's overall talent-management strategy) or informal, but, according to The Conference Board, the following features are common:

  • allows mature employees to work on a reduced or modified basis as they approach retirement (phasing pre-retirement);
  • enables workers who are already eligible for retirement to collect some portion of their pension benefits while they continue to work for pay;
  • allows rehiring the organization's own retirees (phasing post-retirement); and
  • gives retirees the option for phased retirement by going to work for a different employer or setting up their own businesses.

Phased retirement can be any work arrangement that falls somewhere between full-time retirement and working full-time. Formal phased retirement is still relatively rare, partly because employers are skittish about running afoul of pension laws, and partly because companies are reluctant to include all of their mature staff in a phased retirement situation. While the Pension Protection Act leaves important legal questions unresolved, it opens up new options for companies that sponsor defined-retirement benefit plans. Up until now, employers were not allowed to pay retirement benefits from such a plan - as either a pension or lump-sum payment - until an employee had terminated employment or had reached the plan's normal retirement age. The new law lifts that restriction with the benefit year that began on January 1, 2007.

"Many companies focus on compensation issues when they weigh their options for offering phased retirement, but that isn't the right place to start," say the authors. "Instead, employers should first define the talent challenges that phased retirement might help solve. Then they should evaluate which of the many options for phased retirement would be most effective. Figuring out the compensation and benefits should be the final step."

According to The Conference Board, the first step in developing a phased retirement program is to examine the organization's vulnerability or risk exposure as a result of retirements. Initially, this may be a high-level scan that looks at workforce numbers company-wide. Further analysis needs to home in on selected, mission-critical jobs to assess strategic impacts and risk on a case-by-case basis. Companies should answer the following questions:

  • What portion of the workforce is already retirement-eligible or will soon be and which business units, functions, job levels, or jobs are most affected?
  • What specific talent gaps will result and how long would they last?
  • What kinds of firm-specific knowledge are at risk, such as an employee's relationship with key customers or knowledge of particular products and systems?
  • Are there groups of people with specialized knowledge who will be hard to replace?
  • What is the retirement risk for mission-critical or strategically important jobs?
  • What is the retirement risk for individuals who are publicly associated with a brand?

Companies also need to decide if phased retirement will be offered exclusively to retirees or also to active employees of a certain age or tenure; if all retirees will be eligible or only selected ones; and if the time-frame of the program is temporary or indefinite. If an organization wants to promote phased retirement, a formal program is generally the best approach. Informal arrangements are a better choice when a company wants to offer phased retirement only to selected individuals, customize the arrangements, or experiment. In the long term, if informal arrangements are offered to many employees, they become increasingly difficult to manage.

At many colleges and universities, formal programs for phasing pre-retirement provide tenured professors with a fixed period of transition. As part of this buy-out agreement, faculty receives partial pension and pay, along with additional incentive compensation. In some cases, the faculty member continues his or her affiliation with the university after the end of the phased retirement program and may still teach an occasional course. Once tenured faculty finally retire, some are appointed as emeritus professors. Emeriti often retain an office and remain part of the university community. They may participate in committees, do special assignments, or teach a course. For some professional corporate staff who have a strong identity with a professional services firm, something akin to university emeritus status might make sense, say the authors.

"Clearly, the best phased retirement plan is one that matches the needs and interests," say the authors. "But a challenge worth the effort is to develop a system that makes consistently good matches for a variety of people with a variety of skills and experience. In the end, the viability of phased retirement ultimately depends on the nature of the work."

Job variables that affect phased retirement programs include the type of work; availability of talent supply; amount of interdependence with customers and co-workers; the need for special equipment; amount of synchronicity needed with other tasks in the organization; and the type of required knowledge.

"The bottom line is that companies need to make certain that their compensation and benefits support the phased retirement options they have decided to implement," conclude the authors. "Some options may be suited to pro-rata payment of a regular salary with health insurance and some pension credits, while with others it may be best to consider a work project arrangement with a fixed fee or hourly compensation for each project."

The complete report, Phased Retirement After the Pension Protection Act, Report #1402-07-RR , is available for purchase from The Conference Board  (www.conference-board.org).

Source: The Conference Board


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