Former Sears Canada Inc. employees who opt to take the commuted value of their defined benefit pension are facing an immediate 19 per cent reduction in their entitlements.
According to an update to former employees from their legal counsel, Koskie Minsky LLP, the reduction is a result of the underfunding in the Sears pension plan. As of the plan’s most recent actuarial valuation at Dec. 31, 2015, it had a windup ratio of 81 per cent.
“Because the plan is underfunded and the transfer ratio is 81 per cent — the plan is only 81 per cent funded on a solvency basis — there are restrictions put in place about the quantum of commuted-value transfers that can be taken out,” says Andrew Hatnay, a partner with Koskie Minsky’s benefits and pension practice and legal counsel for the non-unionized employees.
Read: Sears Canada seeking to suspend special payments as pension found to be 81% funded
“The theory is it wouldn’t be fair to existing employees if terminated employees are allowed to take out their benefit at 100 per cent and increase the risk to the pension security of the overall retiree population.”
Members whose pension election forms were received by Sears after June 12, 2017, will get only 81 per cent of the commuted value. The remaining 19 per cent is payable over five years, but Koskie Minsky noted it can’t yet say when or if members will receive it.
Read: Sears Canada agrees to continue special payments to DB plan, retiree benefits
Hatnay notes Sears had implemented the prevision on June 12, which was before it sought protection under the Companies’ Creditors Arrangement Act. “There was some confusion over the effective date this would be implemented,” he says. “Anybody seeking to transfer commuted value after June 12 can only transfer out, at this point, 81 per cent of their commuted value.”
The note from Koskie Minsky explains that the outcome of the pension payments will be subject to a number of factors, including the results of the insolvency proceedings and whether the pension plan is wound up.
“We expect it will be moving towards a windup, given that the company is embarking on a sales process,” says Hatnay. “In those types of situations, it is very highly unlikely that any purchaser would take over the administration of the pension plan and it will need to be wound up.”
Read: Salaried employees, retirees approve Stelco’s restructuring plan