As part of its corporate restructuring, Sears Canada will halt some payments it has been making to its underfunded pension plan.
The beneficiaries of that plan will likely see a reduction in their retirement income. Canadians should pay attention because that scenario will like play out again soon, experts told Global News.
Sears Canada has two pension plans. The one it can’t keep up with is a so-called defined-benefit (DB) plan. DB plans are generally regarded as the best employees can hope for because they guarantee a certain level of lifetime retirement income. That, at least, is the theory.
In practice, though, many employers are struggling to keep those promises.
In Ontario, 30 per cent of DB plans are underfunded, according to the latest report by the Financial Services Commission of Ontario (FSCO). It’s a similar story in Quebec, where 29 per cent of plans are running deficits, according to data provided to Global News by Retraite Québec (RQ). (The two provinces are the lead regulators for the majority of Canada-wide pension plans.)
And those numbers are based on the assumption that the employers who sponsor the plans don’t go belly up, or that the plans don’t otherwise cease to exist.
The share of pension plans that wouldn’t be able to meet their obligations regardless of what happens to the parent company is a whopping 73 per cent in Ontario. Quebec could not provide a similar estimate.
The numbers indicate that a Sears-like scenario “will absolutely happen again,” said Howard Levitt, senior partner at Levitt, a Toronto employment and labour law firm.
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Indeed, it has happened several times in the past, for example with the bankruptcy of Nortel Networks, noted Ronald Davis, associate professor of law at the University of British Columbia and a former associate at Koskie Minsky, the firm appointed as representative counsel for Sears Canada retirees.
Low returns from low interest rates and high costs resulting from longer life spans for retirees have made DB plans increasingly difficult to fund.
In fact, the situation has improved from just a few years ago, when financial markets were reeling from the Great Recession, said Davis.
In Quebec, the share of underfunded plans was as high as 82 per cent in 2011, according to RQ.
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Better stock market return, the adoption of different and slightly riskier investment strategies, and interest rates that are finally lifting from historic lows are helping to make things slightly better, added Davis.
Several provincial governments have required employers to pay special payments to their pension plans in order to fill the gap — much like Sears was doing.
But the situation remains dire, according to Davis. Interest rates likely won’t return to the levels seen before the early 2000s, and pressure from pension regulators could push struggling companies toward insolvency, he noted.
The next casualties may well be in the retail sector, he added.
In general, “a lot of companies are in trouble, they have immediate needs, immediate debts and immediate bankers to satisfy, and somehow pensions […] go to the back of the line sometimes,” said Levitt.
Canadians with DB pension plans are still in a better position than many of their peers who have no employer-sponsored retirement benefits at all, said Davis. Barring utter financial catastrophe, they will receive some pension income.
Still, for many employers DB plans are no longer about keeping a promise but about trying to come somewhat close to it, said Davis.
“What they are, really, is ‘best-effort pensions.'”
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