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Big4 have large unfunded pensions obligations to their partners. They typically have long vesting periods which act as golden handcuffs (eg if you leave before 10 years as a partner you get no pension). As an aside, most other professional firms have gotten rid of these pension schemes - as they are unfunded, are an inter-generational wealth claim, and require large growth to avoid dragging down the earnings potential or current partners (ponzi scheme anyone?). Big4 are some of the only firms/companies left with defined benefit schemes (ie old skool “pensions” vs savings vehicles).
O1 states this well. Growth at all cost is driven by the need to feed the mouths of yesteryear. This is what leads to many bad direct entry hires by senior partners. They are hoping that their direct hire bets will produce enough to the overhead during their time at the head of the pack. Hiring for immediate results can produce decent returns, but only occasionally. It’s like buying another firm to achieve what organic growth does deliver when executed correctly. As has been said, you can’t microwave growth or earnings if you want them to be sustainable
There are different plans tied to the year you made partner.
My plan at EY is $400k per year for the rest of your life with 10 year survivor benefits. Way way before me, there was no cap - it was average if your 3 best years.
The new partners now have a different pension benefit - the firm is trying to minimize the unfunded pension plan. I want to say it’s worth about $2-3m now but you’d have to get one of the newer partners on here to confirm.
And yes as others have pointed out, they’re unfunded and yes, we take making new partners very seriously and personally as they will essentially be our pensions.
Is it a straight 25% less than the prior plan? Or is EY doing anything in terms accelerating equity shares to offset that pension reduction?
MBB don’t have pensions You get paid, you save money. All equity is sold down back to the firm at/around time of retirement.
Understood. Thanks!
My understanding is that Big 4 pensions are unfunded, meaning that future payout depends on continued profits from current and future Partners.
D2, can you elaborate on that and share some links? It sounds interesting
It’s just a form of deferred compensation. If you got rid of the pensions you’d likely have to pay more while they were working
Because the firm has an interest in retaining you...that’s why all deferred compensation schemes exist.
Wtf 500k per year???
I don’t know, but that is a defined benefit plan.
Most pensions are now defined contribution plan (removes funding risk for company).
I believe this is really only a “thing” at Big 4. So someone from there will have to reply. But yes the Partner pensions at Big 4 are quite generous.
Partners have a number of deferral mechanisms in place to incentivize retention. None are as long dated as the Big 4 pensions, but they’re there as well
EY recently reduced their plan. I believe pension is now capped at $400k for new partners
.... so if you top 3 years comp was 800k, 1M and 1.2M. Average becomes 1M and hence 500k as pension income. Does this make sense???
I think it’s the average up to 400k. So the max is 400k
I believe ours is now around a $4m cash payment at retirement for fully vested partners
Irrespective of the length of partnership? What if someone was partner for 10 years v 15 years?
Also - what happens if you leave before retirement?