This isn't an uncommon system for MMO's. WoW has a system where you can contact a GM and ask them if a name has been inactive long enough and if it has they can free the name up for you to use. Games like TERA have also done that where if a person hadn't logged in for a certain amount of time, their name was freed up and the character is flagged for a rename. That doesn't always mean just because your name was freed up that you'll lose it, if you've chosen a very unique name then it's highly unlikely that it will be taken from you. It doesn't mean the character gets deleted, only that someone else can get the name if the person hadn't logged in for a while, if someone hasn't logged in for 2-3 years though? I don't see why they shouldn't have their names freed up. I am perfectly fine with that system.

That being said, when you mean popular names, I can only guess that you're referring to completely unoriginal people that lack any sort of creativity and name their character after some popular character from a video game or a book or an anime or a tv show despite it specifically stated as being against the ToS. I'd rather names like that be locked out entirely (looking at all you Kirito/Asuna/Sephiroth/Cloud/Squall wannabes) and I certainly report them when I see them because it's against the ToS.