Weakness in defined-benefit pension plans exposed in Sears Canada case

by Leo Almazora10 Jul 2017
Due to financial difficulties, Sears Canada has sought permission from the Ontario Court of Justice to suspend selected payments to its employee pension plan and other retirement benefits.

“Sears retirees have been raising the alarm about the financial collapse of Sears Canada with the company and the Ontario government for over five years,” Andrew Hatnay of law firm Koskie Minsky, which was appointed to represent Sears Canada retirees, told Global News in an email. “The company is now insolvent, the pension plan is underfunded and retirees are exposed to pension and benefit losses.”

If the company’s motion is granted, it will likely lead to a reduction in the income received by Sears retirees from the retailer’s defined-benefit pension plan, according to University of British Columbia law professor and former Koskie Minsky associate Ronald Davis.

Under a defined-benefit pension plan, members are promised a certain level of lifetime retirement income based on their salary level and years of service. Sears had been paying $3.7 million per month to address a shortfall in funding in its own defined-benefit pension plan.

The retailer had said in previous filings that it would ask for court permission to suspend those payments, as well as contributions to retiree health and life insurance benefits. According to David Vaughan, an employment lawyer at Smfiru Tumarkin, retirees are treated like unsecured creditors under Canadian law; their claims are on a lower priority compared to secured creditors like banks.

In weighing its decision, the court has to balance “the frustrated expectations of people who have worked there for years” against the job security of those still working there, said Howard Levitt, senior partner at employment labour law firm Levitt.

Current employees are also in a precarious position as Sears has said it would let go of 2,900 out of its 17,000 employees — and would not be able to pay for severance packages due to cash limitations. Retirees, meanwhile, can still expect something from contributions already made to the company’s defined-benefits plan.

Sears had closed its defined-benefits plan long ago, replacing it with a defined-contribution plan. Defined-contribution plans are typically less generous; individuals and employers generally contribute a set amount of the employee’s salary, and retirement income — which depends on contribution levels and returns on investment — isn’t guaranteed for life.

On the other hand, defined-contribution plans aren’t affected by insolvency proceedings unless they’re terminated by the company, according to Davis. He said that while many defined-benefit plans have gotten phased out because they’re unaffordable, the ones that still exist are not getting enough contributions to guarantee the retirement income that’s been promised to employees.

The payments Sears had been making to its defined-benefits plan is the same thing other employers have been required to do by several provincial governments. However, such payments are considered unsecured claims under federal law. According to Davis, there is “concern” about what happens to underfunded defined-benefit plans when employers file for insolvency.

Related stories:
Sears Canada seeks to suspend life and health benefit payments
Restaurants step up on kitchen staff benefits