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

April 30, 2018

Whatever the fate of Sears Holdings Corp.’s operations in the United States, the company’s American pensioners are likely to emerge better off than their Canadian counterparts.

Much of that is due to the broad powers available to the Pension Benefit Guaranty Corp., which regulates pensions in the United States. “The PBGC can act pre-emptively, and it is becoming ever more aggressive,” says Carol Buckmann, a lawyer with New York-based Cohen & Buckmann.

To be sure, 1,000 stores are still operating in the United States. Meanwhile, the Canadian operation has been under court-ordered liquidation since June 2017, with the last of its stores closing earlier this year. Recently, the Ontario superintendent of financial services ordered a windup of the Canadian pension fund retroactive to October 2017.

Both the U.S. and the Canadian arm have large pension deficits: $267 million in Canada and a whopping US$1.5 billion in the United States as of January. The underfunding in Canada means Sears’ pensioners face a reduction of approximately 19 per cent to their pensions.

In Canada, however, Ontario’s financial regulator, the Financial Services Commission of Ontario stood by as Sears Canada paid some $611 million to shareholders in 2012 and 2013. The company made the payments even as its pension deficit mounted and its financial position deteriorated.

In January 2018, the Ontario Superior Court appointed a Toronto law firm, Lax O’Sullivan Lisus Gottlieb LLP, to look into the dividends. But that’s all in hindsight, and whether Canadian pensioners will benefit from the investigation is uncertain.

A much different scenario, however, has developed in the Unites States. As Sears’ financial troubles mounted and its pension deficit grew, the Pension Benefit Guaranty Corp. invoked its early-warning program.

“When a plan is in sufficiently bad shape, the PBGC can request the employer to negotiate a pension protection plan,” says Buckmann. “If the employer refuses to do so, the PBGC can take over the plan.”

Here, the Pension Benefit Guaranty Corp. has significant leverage.

“When the PBGC takes over a plan, it exposes not only the employer but all of the related companies in its control group to liabilities equal to 30 per cent of the group’s assets,” says Buckmann.

Faced with that prospect, Sears agreed to a ring-fencing agreement involving 140 properties in the United States owned by Sears and related companies. The ring-fencing agreement meant the Sears group couldn’t sell or encumber the properties without the Pension Benefit Guaranty Corp.’s approval.

Ontario’s pension benefits guarantee fund, however, lacks similar anticipatory pension protection powers, denying it the flexibility its U.S. counterpart has to force pension plan sponsors to negotiate before they end up in insolvency proceedings.

The importance of that leverage became evident in November 2017, when the Pension Benefit Guaranty Corp. released the 140 properties from the ring-fencing arrangement. In exchange, Sears agreed to pay US$407 million into the pension fund from proceeds derived from selling or encumbering the properties. Both sides benefited: the pension fund received a significant injection of funds, while Sears was now free to use the assets to raise cash for its operations.

There’s no guarantee, of course, that Sears’ U.S. operations will survive. But even if they don’t, the government-insured pension scheme there is far more generous than in Canada.

To begin with, Ontario is the only province in Canada that provides any form of guarantee to its resident pensioners. Pensioners elsewhere in the country have no such protection.

In its recent budget, the Ontario government proposed to raise the cap on guaranteed benefits to $1,500 monthly from its current $1,000. The proposal is retroactive, meaning Sears pensioners will benefit if the measure passes.

Even so, the coverage pales beyond what’s available to pensioners anywhere in the United States from the Pension Benefit Guaranty Corp., which is a federal entity.

“The current limit for a single life annuity for a 65-year-old retiree is $5,420 monthly,” says Buckmann.

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