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© Copyright 1999 Rogers Media. The following article first appeared in the December 1999 edition of
BENEFITS CANADA magazine.
Eaton's lost ones
Eaton's unfunded long-term disability plan has left 160 disabled plan members without support. Will
this tragedy spark a call for mandatory funding?
BY JANET WHITE
Ami Gilbertson-Waugh hasn't been out the house by herself in three years. The 31-year-old describes herself
as a "shivering mess" without her medication.
But things weren't always this way. Three years ago, she was manager of ladies fashions at Eaton's
department store in Vancouver. Then she fell at work. Her injured back has healed, but has left a legacy of
anxiety disorder and depression that requires constant medication and psychological treatment. She won't
get that now. Why? She's a member of the now defunct Eaton's long-term disability (LTD) plan. And she has
one question: How could this have happened?
As a member of the Eaton's plan, she's been receiving a monthly cheque since she became disabled. This
money has helped pay for medication, put food on her table and care for her two-year-old son. She was also
provided with an aid, a woman that came to her home to facilitate psychologist visits and other treatment.
"She's helped me through things," says Gilbertson-Waugh.
But in September 1999, her final disability support cheque arrived. Her aid was informed she wasn't to
visit the Gilbertson-Waugh home anymore. The reason? The Eaton's LTD plan, while administered by Imperial
Life Insurance Co. on an administrative services only (ASO) basis, was self-insured--and unfunded. When
Eaton's filed for protection under the Companies Creditors Arrangement Act (CCAA), its disability plan
ceased to exist. Translation: There's no money left for the 160 Eaton's employees on LTD across Canada.
They are all on their own now.
In Canada,self-insured plans don't need to be funded. End of story. Eaton's LTD plan members received a
letter informing them that they were no longer employed with the company, thank you very much, and that
this was the final support payment.
As Gilbertson-Waugh tells her story from her West Vancouver home, her English accent teeters between a
forceful tone and a tightly wound pitch, often cracking with emotion. "My life, financially, has fallen to
pieces. I don't have any money. My husband has already put his life on hold for years to look after me . .
." she says of her spouse, who manages an apartment block in their neighborhood so he can be close by at
all times. "This was never meant to happen to me."
For those connected with the T. Eaton Company Ltd., the LTD situation is just one more tragedy in a long
line of tragedies surrounding the department store chain since as early as 1997, when it originally filed
for CCAA protection. Since then, stores have had their doors bolted shut and liquidation companies have
scurried in and out, selling off the Eaton's bits and pieces in a flurry of hangers and plastic bags.
Long-standing employees have been terminated and debtors are suspended in the judiciary system, waiting to
see how much payment they'll be able to squeeze out of the insolvency agreement.
Above all, however, the situation with the Eaton's LTD recipients elicits pure pathos. Unable to work, the
monthly disability payments have helped these men and women survive. Some are terminally ill with AIDS and
cancer, some have a variety of psychological illnesses and back injuries. They gave their service to
Eaton's, and when they became disabled, their employer offered them a support system through the LTD plan
that was to be made available to them until age 65. Or so they thought.
Since the support system disappeared, this group has been forced to apply for social assistance or Canada
Pension Plan (CPP) disability pensions, drain their retirement savings and borrow from friends and
relatives.
How could this have happened? According to Eaton's benefits manager Steve Townson, quite easily. The plan
was funded through the Eaton's pension plan until 1992, at which time it was pulled out on its own and
self-funded. Townson says at first, nobody took much notice of its growing liability costs. "The first year
or two nobody really thinks about these things," he says. "You've got one individual this month and two the
next month. After a year there's maybe a dozen people and the actual liability of that group is terribly
small. It really took a few years before there were enough people on the plan to make us say, oh geez, this
is something we should think about now."
By 1995, Eaton's LTD liability was high enough that the benefits team approached upper management with the
need to fund it. What happened next would make any benefits manager's blood run cold. They said no.
"We couldn't get the executive to authorize the amount of money that would be required to fund [the LTD
plan]," says Townson. "They needed that money for the running of the company. And it's clear now why they
needed that money because we were not in a very good financial situation."
Eaton's executives were aware of the funding problem with the LTD plan and they decided not to fund it.
Right now, there are no regulations or laws against what they did. They were under no obligation to fund
the plan. But many, not the least of which are plan members, are demanding that someone be held
accountable.
THE REACTION
In the general public, this tragedy has sparked outrage and compassion. In the pension and benefits
industry, however, it begs the question: What can be done to stop this from happening again?
Granted, self-insuring LTD plans is a relatively rare occurrence because of the potentially high costs, and
is undertaken only by large companies. For the most part, however, it's assumed that those who self-insure
will set aside reserves specifically for their LTD members. Eaton's didn't--a fact that perplexes many
industry insiders.
"If you're going to go to the trouble of providing a plan, you may as well put some money in a bank account
and invest it in bonds or T-Bills," says Jeff Schmidt, partner at Morneau Sobeco in Toronto. "All you need
to earn is about 8% per year to make the future payment requirements."
Although there are laws that govern employers' responsibilities for providing pensions, there aren't any in
the disability area. Thirty-five years ago, one of the first regulations enacted under the Pension
Benefits Act was a funding requirement. LTD plans, and health plans in general, on the other hand, are
left unencumbered, a quality that Gary Nachshen, pension lawyer at Stikeman, Elliott says is a refreshing
change for sponsors from the "thicket of incredibly complex and mind-numbing rules," in certain areas of
pension legislation.
"I think one of the things plan sponsors have generally appreciated on the disability and health and
welfare plan side in general is the lack of regulation, which gives them freedom and flexibility," says
Nachshen in Toronto.
But when it comes to healthcare, and specifically LTD, there's one problem: people's lives hang in the
balance if that freedom is misused.
A NEW REGULATORY REGIME?
Just as pension legislation was created to protect pension plan members so many years ago, should there
also be some sort of protection for those members of self-insured, unfunded LTD plans? Should employers be
forced to fund these plans?
Ask Townson at Eaton's if there should be regulations to mandate employers to fund LTD plans and you'll get
an emphatic yes. "No question about it," he says. "I think there should be some intervention to compel
companies to insure or fund these benefits."
Such an environment, of course, would have made his job less heartbreaking at this point, instead of having
to field calls from plan members who are suffering on his watch. "Out of this whole situation, many people
have been affected in bad ways, terrible ways. But the LTD group is the group I feel the worst about," says
Townson. "They've been impacted in the worst way. For some of the seriously ill, it's the drug bills that
are very expensive and it's their drug bills that have been covered. The majority don't have opportunity
for employment . . . it's tragic."
Over at the Eaton's ASO provider, Imperial Life, director of customer service, Paul Hornsby, also says a
regulation review would be welcome. "We have no way of compelling them to keep an adequate reserve and keep
it in trust," he says. "I think it would be good if a discussion [on regulatory change] does ensue. I think
it would be helpful and in accord with the core principals of insurance that the legislation or regulatory
environment catch up with where the market is going and what it's demanding so that there's a common set of
rules applying to everyone."
A look at our neighbours to the south reveals a similar lack of regulation. "There are no regulations in
the U.S. that require funding of any benefit other than a pension plan," says Eileen Raney, national
practice leader for the integrated healthcare group at Deloitte & Touche in Los Angeles, Calif. Raney
says that in the U.S., it's unusual to self-fund disability at all. "If someone's totally disabled, you're
going to be paying them until they're 65, so the liability is way out there. There's also a potential for
sort of an adversarial relationship if the employer is deciding whether or not someone is disabled," she
says, adding that while disability plans are governed under ERISA, ERISA has no funding requirement.
"That's why it's called self-insurance," she quips. "You figure out yourself how you want to fund it."
She has a point. Does corporate Canada need big brother looking over its shoulder in yet another area of
employer-provided benefits?
One salient difference between the U.S. and Canada, however, is that in the U.S., LTD plan liabilities must
show up on the company balance sheet. "Typically what's done is that there's a booked reserve amount so
that the balance sheet of the organization reflects the liability, but there's no money put in an account.
There is a requirement that you have a balance sheet liability, but just putting that on your balance sheet
doesn't mean that there's any cash to pay the obligation."
Under the Canadian Institute of Chartered Accountant's recent Bill 3461, post-retirement benefits
obligations must show up on the balance sheet as a liability. There is no such requirement in Canada for
LTD benefits.
While this step would not have prevented the Eaton's situation, perhaps such recordkeeping might be a good
place to start in preventing it from happening to another plan. Schmidt at Morneau Sobeco points out that
some Canadian companies already do. "We encourage all our clients that have self-funded liabilities to at
least account for them and recognize them."
GOING FORWARD
In the Eaton's case, the LTD group has legal assistance that is attempting to recover some of the lost
income. On Oct. 25, 1999, Toronto-based law firm Koskie Minsky filed an omnibus proof of claim on behalf of
24,000 Eaton's department store employees (which includes retirees who have a claim to health benefits).
The claim totals $141 million, of which about $10 million is for the LTD recipients' incomes and drug
claims calculated on the basis that payments would have been required until age 65. On Nov. 19, the
insolvency plan was voted on and agreed to. Creditors and employees, including the LTD group, will get
52ยข on the dollar.
Among those represented by the claim is 56-year-old Winnifred Erwin. When Erwin talks, she sighs, a lot.
Almost like she's trying to let pain out of her body through her vocal cords. Her voice is soft and breaks
often, especially when she talks about her grandchildren, of which she has three. "My greatest regret is
that I can't play with my newest grandchildren like I did the first one. I just can't do it anymore."
Erwin was put on the Eaton's LTD plan in September 1996, after nine years at the Eaton's warehouse in
Hamilton, Ont. She was originally diagnosed with clinical depression, but her disability has since come to
include rheumatoid and osteoarthritis, conditions that produce debilitating pain in her knees and back--and
demands expensive drugs.
Since her coverage was cut off, Erwin has been charging drugs to a credit card, a practice that can't be
sustained much longer. She's also dipped into her retirement savings to keep on top of things. "It's taking
everything I've got," she says from her east Hamilton home, where she and her 63-year-old husband are
presently surviving on his company pension. He doesn't have post-retirement benefits.
Going forward, whatever regulatory changes this case might incite, the reality for the Eaton's LTD members
won't change. "It's a regulation issue for the future, but a travesty for members now," says Koskie
Minsky's Susan Philpot.
For both women, this turn of events seems to be yet another blow in a line of confidence-shattering events
that began with the injuries and conditions that landed them on LTD in the first place. "It's been a hard
process and a draining process," says Gilbertson-Waugh. "It sets you back a long way because you don't know
what's going to happen."
In an interview prior to the November vote, Gilbertson-Waugh was curt about the possible settlement. "I
have huge medical bills. That's not going to go anywhere. That's no compensation for the next how many
years of my life. Somebody's got to be responsible for what's happened to us."
Janet White is associate editor at BENEFITS CANADA.
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