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New Regulations May Drain Senior Staff

May 11, 2007
Related Topics: Work/Life Balance, Retirement/Pensions, Latest News
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Last year’s pension law was supposed to make dealing with complex retirement issues easier for companies, but in at least one instance, it might have the opposite effect.

 

One provision in the Pension Protection Act attempts to solve the problem of legal restrictions on providing distributions from pension plans to retirement-age employees who are still working. The problem is becoming acute because, with fewer young people due to enter the U.S. labor force in coming years, companies are expected to try to persuade older employees to work longer, if for fewer hours.

 

Under the law, employees who are still working at a company can start to receive a company pension at age 62.

 

But businesses are concerned that when the government issues regulations implementing the PPA measure, it might incorporate some of the burdensome rules that the IRS proposed in 2004.

 

The IRS’ proposal “was a pretty unworkable regime,” says Lynn Dudley, senior counsel for the American Benefits Council, which represents large companies on benefits issues. “It required counting of hours. It required you to have a normal retirement date that was consistent with your industry. It was a very complicated set of regulations.”

 

On the other hand, companies regret that the law set a starting age of 62, instead of the 59½ the IRS had proposed. In fact, some are pushing for letting active workers access pension assets at an even younger age: The American Benefits Council supports allowing workers to draw upon both defined-benefit and defined-contribution plans starting at 55.

 

“The actual retirement age in the U.S. has dropped significantly,” Dudley says. “It’s not that people don’t continue to work, but they desire a more flexible structure.”

 

Employers are concerned because they don’t want to lose valued employees, she says.

 

“A lot of people who can retire early, at age 55, leave and go work for somebody else. We’re trying to make it attractive for them to stay.”

 

Joel Rich, a senior vice president at Sibson Consulting, a division of human resources consulting firm the Segal Co., said companies will wait to see what the regulations implementing the PPA provision look like.

 

“If it turns out that it’s going to be administratively burdensome, it may not be worth the effort,” he says.

 

Despite a steady stream of articles and conferences about the aging workforce in the past few years, a recent survey of 1,000 U.S. companies by Manpower Inc. showed that just 28 percent have a strategy for retaining older employees.

 

Their strategies aren’t necessarily the phased retirement envisioned in the pension law, in which employees reduce their hours or responsibilities while starting to draw pension benefits. A 2006 Ernst & Young survey found that while 14.3 percent of companies had strategies in place to retain the “business wisdom” of older workers, just 2.6 percent had instituted phased-retirement programs. Eleven percent of the companies that had strategies cited flexible work scheduling, and 10.3 percent said they hired retirees as consultants or contractors.

 

The relatively slow pace at which companies are moving is not just about government regulation. Bill Arnone, practice leader for employee financial services at Ernst & Young, argued that human resources departments are “swamped” by a number of issues that take precedence over the aging workforce, like executive compensation, stock options and pension law changes.

 

The companies surveyed by Manpower cited cost and productivity as barriers to implementing strategies. Health benefits for older workers are more expensive than those for average employees, Arnone said. “A one-year increase in the average age of the workforce will lead to a 3 percent increase in health care costs.”

 

Rich noted a company’s level of interest in retaining older employees depends on the demographics of its workforce. And although the regulations for the PPA measure aren’t yet written, it’s possible they will make it hard for companies to offer phased retirement only to some employees rather than to all who are of retirement age.

 

If a company wants to persuade just a few employees to stay on, “it probably makes sense to do something else,” such as offering the targeted employees flexible hours or giving them a bonus for staying on, he said.

 

Filed by Susan Kelly of Financial Week, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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