Citing preliminary results from a partner compensation survey by Major, Lindsey & Africa, the American Lawyer reports that 16 per cent of partners will retire in the next five years and 38 per cent will retire in the next decade, the most ever experienced by BigLaw.
The impact will also be exaggerated because law firm headcount has grown at a slower pace since the financial crisis; the number of lawyers at the 100 largest law firms grew on average by 5 per cent each year from 2000 to 2008, but has only averaged 1.2 per cent growth per year since 2009.
The retirement wave is set to impact client relationships, with an Altman Weil survey showing that partners age 60 or older were responsible for at least a quarter of law firm revenue at 63 percent of the responding firms. ‘Firms that aren’t focused intently on transitioning client relationships by now—particularly firms that emphasise originations and billings over collaboration—are at greatest risk,’ the article reports.
Another huge issue is the financial cost of retirement. The American Lawyer reports in a separate article that some law firms do not fund their pension obligations, so benefits will have to come from annual profits. Twenty-three per cent of the partners responding to the partner compensation survey said their law firm has such a pension plan, including many elite New York firms.
Firms with tax-qualified defined benefit plans also have some financial risk, as they are funded by lawyer contributions but the payout is guaranteed. If the investments funding the plan underperform, the law firm will have to top off the plans so the guaranteed payout can be made. Sixty-one percent of the of the US’ top 200 law firms have tax-qualified defined benefit plans, according to retirement plan analytics firm Judy Diamond Associates.
The return of capital presents another problem. Because capital is tied to compensation levels, law firms are returning more capital to retiring partners than they are bringing in from new partners, says Altman Weil principal James Cotterman. He told the American Lawyer that firms ‘might need to adjust their capital retention to be able to manage their way through the changing of the generational guard.’
Offsetting the cost
Measures being taken by law firms to offset the cost of retiring partners include increasing the retirement age, capping the annual payout from annual earnings or changing the payout formula and switching to defined contribution plans so that lawyers carry the risk of a declining market.