Offer sweeteners to entice grey-haired partners to retire early

Once upon a time, years and years ago – and here I mean going back to at least 2007 – UK partners approaching retirement could do so with equanimity.

Many had earned increasingly well over their careers – more probably than they could have expected when they set out as trainees (or even as articled clerks). Having paid off the mortgage and dealt with school fees, they could top up their pensions at a rate of over £200,000 a year, on which they received a higher-rate tax relief and, although their pension pots were capped, their prospective pensions (in the form of drawdowns and annuities) still looked attractive and sufficient.

There was also still the expectation that, having made it that far, their firm would be happy for the partner to go at the time of his own choosing, probably some time before the compulsory retirement date set out in the partnership agreement, without being hurried on his way by his whippersnapper partners.

Few of us need reminding how things have changed. Earnings since the credit crunch have mainly gone down; pension returns are poor; pension contributions on which higher-rate tax relief is available are capped at £50,000, having been even lower; income tax is higher and there is increasing pressure within firms to deequitise or worse.

And all of this against a background of uncertainty created by legislative changes in relation to age discrimination and the Legal Services Act, which was conceived in the good times but is bearing its progeny in the form of alternative business structures (ABSs) in the bad.

Age discrimination

Equity partners, being treated as self-employed, have not typically been subject to a compulsory retirement age, although in practice many firms have adopted in their partnership agreements the age of 65 as the date by which partners retire. Any compulsory retirement age in the partnership agreement will now have to be objectively justified, with the default retirement age being removed in October.

The lack of a compulsory retirement age meant that firms in several cases have already been called upon to justify the date for retirement imposed upon their partners. This has not been easy to do.

One solution to the uncertainty here is to abandon any compulsory retirement age for partners (and others) and to deal with issues by performance management and career planning alone. This is difficult and has the added disadvantage that an imperfect performance management process could well of itself trigger an age discrimination claim.

There might be more certainty regarding compulsory retirement when the Supreme Court has decided on Seldon v Clarkson Wright & Jakes. At the very least, the court might uphold the principle that, because the legislation envisages that a default retirement age is justifiable, then some age ought to be capable of being justified. However, at present not even this is certain, to the detriment of both individual partners and their firms.

Alternative business structures

Although the full introduction of ABSs has been delayed from the 6 October target date, the regime will undoubtedly be upon us soon. The question for the grey-haired partner is what he should do if he believes the ABS largesse is coming the way of his firm, either in the form of an investment in his firm or by virtue of his firm becoming the target of a firm which is itself third-party funded. In each case, the partner has the possibility of realising his stake for cash, subject to capital gains tax at perhaps just ten per cent if entrepreneurs’ relief applies (which it should). 

The prospect of that gain might encourage the partner to hang on. One way in which the firm might try to avoid this is to introduce an anti-embarrassment clause into the partnership agreement, whereby a partner who leaves the firm is entitled to a share of any capital gain made by the firm or its partners on a sale or profit of the firm’s business or the disposal of partners’ interests in the firm. This share would diminish over time.

Enticements

The firm can also offer a sweetener to entice partners to go earlier than they might do otherwise. This would be a voluntary carrot rather a compulsory stick and the outgoing partner would be offered a part-time consultancy for a set number of years with an income which is related both to what he would have received if he had stayed and to what the firm earns during the consultancy period.

This helps the partner with his career planning and need for income and helps the firm by avoiding stage-managed performance reviews and the ill-will they can create, and at the same time creating room in the partnership for more junior members of the firm.

And speaking as a consultant, such a deal is attractive: it allows me to not only maintain a connection with the firm where I was a partner for over 25 years but also to enjoy a change of tempo and pursue other (non-legal) interests.