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Sears Holdings Corp.
of the
SHLD -23.83%
The decision to seek bankruptcy protection led to a new scrutiny of its underfunded pension plans. It is unclear whether the retailer can afford to pay for its 90,000 workers and retirees who could benefit – and if not, the government could be involved.
The bankruptcy of Sears includes a tangle of provisions that establish liens on the company's real estate and intellectual property to protect against the repayment of its pension debts and illustrates the importance of contributions to plans that have weighed on activities of the company.
Sears, which filed for Chapter 11 protection against bankruptcy on Monday, has two pension plans with $ 2.5 billion in cumulative assets and a $ 1.5 billion funding gap at the end. 2017, which suggests that Sears plans are funded at approximately 63%.
By way of comparison, the standard pension was finalized at 87.6% at the end of 2017, according to the Milliman 100 Pension Funding Index, which tracks the funded status of the 100 largest defined-benefit pension plans in the country. business.
Pension Benefit Guaranty Corp., the government insurer, said Monday that its guarantees would cover the vast majority of Sears plan benefits. The plans were frozen for benefits accrued in 1996 for former members at Kmart and in 2005 for Sears employees, the agency said. The PBGC, which serves as a support for business pension funds, receives no taxpayer funding but is funded by insurance premiums paid by the pension plans.
For now, however, Sears is still on the hook. His bankruptcy filing did not put an end to the plans and the retailer retains the responsibility to pay his retirees.
The company contributed to the plans this year. According to regulatory filings, he paid $ 343 million in the 26 weeks ended August 4. The value of plan assets has likely increased due to rising interest rates and stock prices.
Termination of the plans would free up money for the company to be able to invest in the business, and the pension experts believe that the company might seek to do so.
Last month, Edward Lampert, who was then president and CEO of Sears, blamed pension payments for delaying the company, which had paid nearly $ 2 billion to his pension plans over the past year. last five years. "If the company had been able to use these billions of dollars in its operations, we would have been better positioned to compete with other large retail companies, many of which do not have large pension plans," said Mr. Lampert. .
Following the bankruptcy, Mr. Lampert left his duties as CEO but remains the president of the company.
To end the plans, Sears should demonstrate to the court that he could no longer afford them. The most likely way for Sears to get court approval would be to show that it can not stay in business or reorganize while funding the plans.
"The PBGC will not simply take over the pension plan because you want it," said Peggy McDonald, Senior Vice President and Actuary at Prudential Retirement. "You must be so incapable of meeting your obligations that the PBGC must intervene for the benefit of plan members."
The vast majority of people covered by Sears pension plans should not see their monthly benefits reduced if the PBGC supports these plans.
The agency has legal limits on how much it can pay per beneficiary, but the size and scope of Sears' plans suggest that most participants are below the threshold.
"The people who will be the most protected will be the members of the base," said Eric Hananel, tax director of the firm of accountants and consultants UHY Advisors Inc. Ordinary workers generally receive less profit after bankruptcy proceedings than employees ranked higher executives who have to pay a larger pension.
Sears has classified the PBGC as its main unsecured creditor in the court documents, with a claim described as unknown. Retirement experts said the agency's claim depended on the company's termination of the pension plans.
The PBGC has additional leverage to engage in trading before taking control of the pension plan. Sears entered into a pension protection and withholding agreement in 2016 with the PBGC, which granted it the so-called "elastic privileges" on Sears Kenmore and DieHard intellectual property. These privileges would only be triggered under certain conditions, for example if Sears did not make payments to its pension plans.
PBGC may initiate an unintentional period of time based on factors such as non-compliance with minimum statutory funding requirements or predictions that the long-term loss of the PBGC in relation to the plan will unreasonably increase. In this case, the agency should decide that this scenario is the best path for the beneficiaries.
For now, however, the future of the plans remains uncertain, industry experts said, as Sears has not yet indicated whether it will seek approval to terminate the plans.
Write to Tatyana Shumsky at [email protected]
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