As a result of the Pension Protection Act (PPA), employers can pay pension benefits to employees age 62 and older covered by a defined-benefit pension plan, even if they continue to work. Up until now, employers were not allowed to pay retirement benefits from such a DB plan – as either a pension or lump-sum payment- until an employee had left the company 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, the report pointed out.
“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,” said report authors Anna M. Rappaport and Mary B. Young, in the news release. “As the U.S. workforce grows older and life expectancy continues to rise, the play book for retirement is being rewritten.”
Phased retirement can be any work arrangement that falls somewhere in 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.
“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.”
What Questions to Ask
According to the study, the first step in developing a phased retirement program is to examine the organization’s vulnerability as a result of retirements. Initially, this may be a high-level scan that looks at workforce numbers companywide.
The study suggested the following questions for such an organizational review:
- 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, knowledge of particular products, systems, etc.?
- Are there groups of people with specialized knowledge who will be hard to replace such as research scientists in pharmaceuticals or nurses in hospitals?
- What is the retirement risk for mission-critical or strategically important jobs?
- What is the retirement risk for individuals (such as the chief economist of a bank) 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, the study said.
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, the study said.
“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,” the authors concluded. “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.”