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Phased Retirement Programs: Questions to Ask, Actions to Take
Companies benefit by retaining skills, while mature workers get more options

By Stephen Miller  11/12/2007
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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 new report by The Conference Board, Phased Retirement after the Pension Protection Act.

Formal phased retirement plans have been relatively rare, partly because employers have been skittish about running afoul of pension laws, and partly because companies have been reluctant to include all of their mature staff in a phased retirement situation, according to the report.

But as a result of the Pension Protection Act (PPA), 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. While the PPA leaves some 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 planas either a pension or lump-sum paymentuntil an employee had terminated employment or had reached the plans normal retirement age.

The new law lifts that restriction with the benefit year that began on Jan. 1, 2007. (For more on the relevant provisions of the PPA, see Pension Law Eases Way for Phased Retirement. )

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 report authors Anna M. Rappaport and Mary B. Young in a statement. As the U.S. workforce grows older and life expectancy continues to rise, the playbook for retirement is being rewritten.

The new law makes phased retirement a viable option
for employers who want to capitalize on mature talent.

What's Involved

Phased retirement can be any work arrangement that falls somewhere in between full-time retirement and working full-time. There is no universal definition of phased retirement, whether formal (part of an organizations overall talent management strategy) or informal, but some features are common. A phased retirement program will:

Allow mature employees to work on a reduced or modified basis as they approach retirement (phasing pre-retirement).

Enable workers who are already eligible for retirement to collect some portion of their pension benefits while they continue to work for pay.

Permit rehiring the organizations retirees.

Give retirees the option of going to work for a different employer or setting up their own businesses.

"Many companies focus on compensation issues when they weigh their options for offering phased retirement, but that isnt the right place to start, say the authors. Instead, they recommend the following steps when developing a phased retirement program:

Step One: Talent Challenges
Examine the organizations vulnerability or risk exposure as a result of retirements.

Initially, this may be a high-level scan that looks at workforce numbers companywide. Further analysis needs to home in on selected, mission-critical jobs to assess strategic impacts and risk on a case-by-case basis.

Questions executives must ask themselves include:

What portion of the workforce is already retirement-eligible or will soon be, and which business units, functions, job levels or jobs are affected most?

What specific talent gaps will result, and how long would they last?

What kinds of firm-specific knowledge are at risk, such as an employees 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?

Step Two: Program Design
Evaluate which of the options for phased retirement would be most effective

This involves, for example, deciding 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, experts say. Informal arrangements are a better choice when a company wants to offer phased retirement only to selected individuals, to customize the arrangements or to experiment. In the long term, if informal arrangements are offered to many employees, they become increasingly difficult to manage.

Job variables that affect phased retirement programs include:

Type of work needed.

Availability of talent supply.

Amount of interdependence with customers and co-workers.

Special equipment needs.

Amount of coordination necessary with other tasks in the organization.

Types of required knowledge.

Step Three: Payment Calculations
Figure out compensation and benefits issues.

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.

Stephen Miller is manager of SHRM Online's Compensation & Benefits Focus Area.

Related Article:

Pension Law Eases Way for Phased Retirement Plans, SHRM Online Comp & Benefits Focus Area, September 2006

Stephen Miller is an online editor/manager for SHRM. 

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