Sears Canada pensions clawed back due to overpayment

Sears Canada Inc. retirees are facing clawbacks to their pensions due to 10 months of overpayments.

Since October 2017, the retailer’s former employees have been receiving 100 per cent of their entitlement, rather than the reduced rate that aligns with the plan’s underfunded status. Morneau Shepell Ltd., the firm overseeing the plan’s windup process, originally recommended a windup date of Oct. 1, 2017. However, a creditor of the Sears estate objected, which delayed the process until March 2018, when it withdrew its challenge of the windup order, according to Hamish Dunlop, a managing principal at Morneau Shepell.

“The impact of a windup order means that pension members are entitled to their benefits at the reduced or final funded level of the plan, effective as of the windup date on a go-forward basis,” he says.

Read: Sears DB members facing bleak payout prospects as company reduced to ‘shell of itself’

While final calculations to discover the actual funded ratio of the plan can take a long time to iron out, the last valuation put the level at 81 per cent, Dunlop notes. However, since there are still outstanding claims on Sears Canada’s assets, that ratio is impossible to determine for certain, he adds. “There is still a lot of work that we have to go through before that number becomes a final number. The windup process for a plan of this size, we are estimating, is going to take somewhere around three years in order to complete.”

During April and May, Morneau Shepell calculated its best estimate of the pension payment reductions, says Dunlop, noting plan members began learning in recent weeks that a cutback would be necessary address the 10 months of payouts to pensioners at their full entitlement. Beginning in August, pensioners will receive 70 per cent of their original pension entitlement for a 20-month period. That 70 per cent reflects both the plan’s estimated funded status at 80 per cent, as well as the reduction necessary to gradually make up for the full entitlements plan members had continued to receive after the windup date, says Dunlop.

“At the end of the day, if, for example, the final funded ratio was 80 per cent, everybody would get 80 per cent [at the end of the 20-month period] on a go-forward basis, and there would be no long-term reduction beyond that level for pensioners,” says Dunlop.

“Again, it could be 82 per cent, it could be 78 per cent. And that’s all under the assumption that 20 months is the appropriate amount of time.”

Read: Sears issues back in spotlight amid updated forecast for pension, benefit claims

Once the windup process is complete, he says, Morneau Shepell will address any discrepancy caused by the reduction in benefits. “But by recovering the overpayments during the windup period, we make that net adjustment as small as we possibly can,” he says. It’s difficult to know exactly how long such a process will take, however, and Morneau Shepell may need to revisit its assumptions about the funded ratio as time goes by, Dunlop notes.

“The idea is to recover the overpayment everybody has received so that everyone who is going to receive a pension in the future is going to be treated equally in terms of what they’re entitled to out of the pension plan,” he says.

There’s always a chance the estimates could end up being wrong, he adds. “At the end of the windup period, we may find, particularly if we get money out of the estate of Sears — and we are a claimant against the estate of Sears — that 80 per cent is too low a number, in which case the members will have been underpaid and we will provide them with a top-up payment.”

A change to their payments will be very difficult for pensioners, says Ken Eady, vice-president of the Store and Catalogue Retiree Group, a Sears Canada retiree association.

Read: A look at Sears’ U.S. pension prospects as Canadian windup ordered

In Ontario, the pension benefits guarantee fund reduces the impact for many pensioners, he says. But since such protection is only available in Ontario, the transition to 70 per cent payments will be even more difficult for pensioners in other provinces, Eady notes. “These are not people with large pensions, the majority of them, and it’s going to mean a substantial impact.”