While Sears Canada Inc. shareholders deal with stock losses as the company moves to file for bankruptcy protection, pension plan members and retirees face worries over a $308.6-million deficit related to its retirement benefit obligations.
According to the struggling company’s annual report for 2016, its registered pension plans had a deficit of $110.3 million for that year. That was down from $120.1 million in 2015. Adding to its retirement obligations are a deficit of $196 million for life insurance and medical and dental benefits owed to retirees through a health and welfare trust. Further boosting the overall deficit was a $2.3-million shortfall in the company’s non-registered supplemental pension plan.
Sears, of course, has been struggling for years in both Canada and the United States. But after years of attempts at a turnaround, the company expressed doubts about its future earlier this month. And on Thursday, Sears announced it’s seeking protection under the Companies’ Creditors Arrangement Act. According to The Canadian Press, Sears Canada shares fell 22.5 per cent, or 18 cents, to 62 cents on the Toronto Stock Exchange on Wednesday before a halt in trading on Thursday. The latest troubles came after the company reported an annual loss of $321 million for 2016. The loss was up from $68 million the year before. Same-store sales fell 4.3 per cent in 2016, according to the annual report.
Following the announcement of the move to seek creditor protection, Sears revealed plans to close 59 stores across Canada and cut about 2,900 jobs. It also announced it had obtained an initial order from the court under the restructuring act.
“The initial order does not apply to Sears Canada pension plan assets (i.e., the amounts that have previously been contributed into the pension plan), which assets are held separate from the assets of the Sears Canada Group,” the company said in a statement. “Accordingly, monthly pension payments to beneficiaries from that pension plan are not affected by the initial order and will continue in accordance with the terms of the plan.”
Sears Canada retirees have been raising concerns about their benefits for some time. According to a letter sent by the Sears Canada Retiree Group in 2013 to the company’s chief executive officer at the time, the pension plan had a deficit of $198.8 million as of January 2012, while the health and welfare trust was showing a shortfall of $252.7 million.
The letter took issue with the company not making contributions to the defined benefit portion of the plan for a period of time and its 2009 announcement that it would stop funding the trust and would use funds from it to pay current operating expenses related to active employees. It also criticized an extraordinary cash dividend paid to shareholders.
The pension plan is, in fact, a hybrid defined benefit and defined contribution arrangement. A decade ago, the company announced a redesign that would discontinue contributions towards defined benefits, with employees keeping all amounts accrued up to June 30, 2008. The company also ended retiree benefits for those who didn’t qualify for them by the end of 2008. As part of the changes, Sears introduced a new defined contribution component to the plan. In 2013, the company further changed the pension plan to eliminate a benefit for employees who voluntarily resign prior to the age of retirement.
As of the end of January 2017, the plan was using a discount rate of 3.7 per cent to calculate its pension obligations. The pension plan’s investment mix includes fixed income (58.3 per cent); equities (41.6 per cent); and alternative investments (0.1 per cent). During its 2016 fiscal year, the company changes its target asset allocation to range from 50 to 70 per cent for fixed income and 30 to 50 per cent for equities.
Sears Canada employees and retirees aren’t the only ones facing uncertainty. With the company also in trouble south of the border, Sears Holdings Corp. reported a pension shortfall of US$1.6 billion earlier this year, according to media reports. The U.S. counterpart has also raised doubts about its future as a going concern.