The Wall Street Journal had an article recently titled "Next Pension Clash: Law Firms" with the subtitle "Unfunded plans burden younger partners, but build loyalty among small group".
At some of the country's top firms, younger lawyers will foot the bill for deluxe pension plans that could drag down their own earnings for years to come... these pensions are largely unfunded. Partners at some elite firms are often entitled to between 20% and 30% of their peak pay after retirement - in many cases, for life... that could mean payments of $400,000 to $600,000 per retired lawyer.One of my friends who is a partner in a professional services firm once told me that he'd never tell his son to go into a business where he was "selling his time". While there are many other attributes (a senior person is selling his time AND his ability to manage and supervise staff), there is a lot of truth to this quote.
Thus the partner, who was well compensated while he was at the firm, is now going to collect a pension in the future, while he is no longer contributing to the ongoing revenues of the firm. It is true that the client relationships that the partner built up (and left behind) are valuable to the firm, along with any specialties that the partner built up (and trained staff on), but the bottom line is that most of that revenue stream is up for grabs soon after the partner is gone. Even if the clients are left in good shape and well transitioned, if the NEXT partner doesn't do a good job, all that goodwill is drained very quickly.
Like all unfunded pension schemes - it is really a "bet" on the future, on an era of rising prosperity, and a bet that paid off for a generation of retired lawyers. For those coming up the ranks, however, the future of course looks more uncertain, with more vicious competition and increasing use of offshore resources for more mundane matters, which both can be a source of short term profits as well as a long term threat of cannibalization of higher margin revenues up the chain.
It seems like these sorts of burdens would turn off rising lawyers, who have the ability to "jump ship" quite easily since non-compete laws generally don't apply to lawyers, from what I understand (it is interesting how those that write the laws that entangle everyone else managed to develop an escape hatch for themselves). These sorts of payouts, which come out of partner profits after all expenses have been allocated, can be significant in harder times.
Traditional pensions are also under intense pressure, especially since the "rate of return" assumptions are being reduced with the Fed's extremely low interest rates. This article sums up how corporations are asking for relief:
The latest bid is spurred by the effects of the Federal Reserve's low interest-rate policy, which has led to soaring pension liabilities.
While the companies are basically arguing that interest rates are artificially low and that their funding requirements shouldn't surge as a result, the unstated point is that returns for EVERYONE have gone down, as well. Many models for investors in 401k plans used to assume 10% rates of return indefinitely; given market volatility and flat returns over the last DECADE, 10% / year seems ridiculous to investors of all stripes.
The pension firms in this article often have different challenges because they are often unfunded and totally dependent on future revenue streams; in this sense at least they are immune from the Fed's zero interest rate policy distortions.
Cross posted at Chicago Boyz