Younger equity partners at King & Wood Mallesons in Australia could miss out on retirement payments as the firm's decision to phase out its early retirement scheme (ERS) starts to take effect.

The decision to abandon Mallesons' ERS came at the end of 2012, less than a year after it merged with Chinese outfit King & Wood. It was part of a package of measures introduced to boost the overall profits of the Australian partnership along with its move from a rigid lockstep to a modified remuneration system.

Introduced in the year 2000 as a way of bringing younger lawyers into the partnership, the ERS originally entitled senior equity partners in Australia to one and a half years' earnings payable in equal instalments over a five-year period upon retirement – providing they left the firm between the ages of 55 and 58.

It is now understood to be in the early stages of being wound down, with the amount payable each year corresponding to a lesser portion of partners' earnings, and no new equity partners being admitted.

Those expected to suffer the biggest loss are the younger equity partners at the firm, who will continue to pay into the scheme until it is discarded completely but may not receive any reimbursement.

One ex-partner, who asked not to be named, said: "The younger the partner the worse the impact. Some of them may not benefit from the scheme. 

"When the change was being talked about it caused quite a bit of disruption in the partnership, because everyone started doing calculations thinking what does it mean for me."

Under the original policy, the amount paid to partners gradually reduced if partners retired after the the age of 59, with them forfeiting their entitlement altogether at the age of 65.

For those leaving within the eligible age range, they could choose whether the sum was based upon the previous three years' profits or those of the coming three years, but were required to give at least six months' notice in time for June 30 or December 31 of any given year.They also had to have been an equity partner at the firm for 10 years in order to benefit.

Another source close to the firm admitted the scheme was unaffordable and unsustainable, costing each partner approximately A$100,000 per year. 

However, they agreed that younger partners were likely to lose money between now and the scheme being terminated in order to subsidise payouts to those nearing retirement age.

"The biggest issue is that younger partners through this period will be funding this through their profits but not getting any benefits. This is a pretty big bottom line issue for them.

"You ended up with three categories of partners – those retiring [in the short term who would] receive almost the full amount, their payments into the scheme would be less than what they got out of it, a group who by the time they are entitled to receive it would have paid out much more than they would get out of it, and then the junior partners who would continue to fund it until it is phased out but not receive anything."

King & Wood Mallesons declined to comment on the decision or specify when the scheme would finally be terminated, but partners said the phase-out period would last until at least 2020 to accommodate those who had planned their retirement around it.

They added that it was not motivated by the merger with King & Wood, but the decision to phase out would certainly have benefits for any financial integration with the Chinese firm, or indeed SJ Berwin, in the future.

"There was talk of integrating China, and there will be talk of integrating the EU," continued the source. "This is a big issue because it goes to the bottom line. They [the other firms] don't have similar schemes. This is a big drag on the Australian firm's profits, so it had to go."