PwC Australia to cut payments to retired partners by at least 25
Former partners were told about the cuts to the retirement payments, known in the firm as the post-termination payments (PTP) scheme, in an email and online meeting on Wednesday afternoon.
Financial modelling carried out for PwC shows that the retirement payments would have breached a cap within the partnership agreement this year. The cap is set at 15 per cent cap of each year’s profit.
“The governance board has been informed that based on management’s most recent financial forecasts, payments to the majority of former partners may need to be reduced by between 25 per cent and 28 per cent although depending on the date of admission and retirement, the impact may vary,” chairman John Green wrote in the email sent to partners on Wednesday afternoon.
“A significant reason for why we expect to exceed the cap is the reduced size of the partnership, which is approximately one-third smaller than it was 18 months ago … put simply, we have a larger number of PTP recipients accessing a share of a smaller Partner Pool. Based on the Partner Pool forecasts, actuarial advice is that the unreduced PTP payments will likely materially exceed the 15 per cent cap for a number of years.”
Mr Green also wrote that the changes mean that retired partners may have been overpaid, due to timing differences between when the firm’s financial results were finalised and when the retired partners were paid. That means that the overpayments will be taken out of the future reduced payments.
‘Reinvention journey’
In the email, Mr Green also told former partners that the firm was “well progressed on our reinvention journey” following the tax leaks matter.
“We are overhauling our governance and risk management, have introduced a new leadership team ... we also continue to see significant wins in the market, and I hear from the many clients I meet how strongly they value their PwC teams and how keen they are to see us succeed in our reinvention,” he wrote.
“The changes we’re making are setting the firm up for success and paving the way for a prosperous future. One where we are the leading professional services firm, built on the highest ethical and professional standards”.
Payments a ‘recognition of service’
The retirement payment plan provides annual income to former partners – some for life – out of the continuing profits of the firm. It is designed to reward former personnel for their work, stop them joining rivals and encourage loyalty to PwC long after they have departed.
Mr Green said in his email the plan was “recognition of a former partner’s individual service and contribution to the firm, with partners qualifying for the scheme after 7 years as an equity partner”.
The scheme has raised conflict of interest concerns when former partners take on positions at organisations that are buying or may buy services from PwC and grumbles from current partners about having to “work one day a week” for former partners.
PwC’s rival big four firms Deloitte, EY and KPMG all ended their equivalent retirement payment program decades ago. A handful of these retired partners still receive payments under long-shuttered schemes.
More than 625 partners were on the program as of June 2019, meaning the cost of the program at that stage was more than $85 million. The current partnership had grown to 822 by 2023 but has now fallen back to 655 in 2023-24.
This estimated cost of the program has now ballooned to about $100 million a year, implying that the firm’s projected profit has fallen to an estimated $650 million a year.
Once secret program
The existence of the closely guarded program was first reported upon by the
Financial Review
in 2019. PwC initially declined to comment on the program but eventually confirmed details of the scheme. The firm also subsequently changed its rules to oblige former partners receiving the payments to disclose the income where appropriate.
The PwC tax leaks matter involved a former tax partner sharing secret government information within the firm. It was then used to develop schemes to sidestep new tax laws he was helping to develop. The scandal rocked the firm’s Australian operation, led to its takeover by PwC International, and has increased scrutiny of the multibillion-dollar consulting sector.
As part of the fallout, PwC sold its public sector consulting arm to private equity investor Allegro Funds in July 2023 for $1 after being cut off from winning new federal government work.
That deal led to about two dozen of the roughly 100 partners who moved across to the new company, Scyne Advisory, being paid the value of their accrued partnership retirement payments last year, at a cost to the firm of more than $10 million. The amounts were the subject of hard-fought negotiations between the eligible partners and PwC, with the highest individual payout worth almost $1 million.
