Shumsky, T. (2018, Oct 16). Bankruptcy filing shifts spotlight to sears’s pension

Shumsky, T. (2018, Oct 16). Bankruptcy filing shifts spotlight to sears’s pension plans; pension benefit guaranty corp. may need to step in if retailer unable to pay pension benefits. Wall Street Journal (Online) 
Sears Holdings Corp.’s decision to seek bankruptcy protection has brought new scrutiny to its underfunded pension plans. It is unclear whether the retailer has the means to pay its 90,000 workers and retirees who stand to benefit from them–and if not, the government may have to step in.
Sears’s bankruptcy includes a tangle of arrangements that put liens on the company’s real estate and intellectual property as protection against spurning its pension debts, and illustrates how much contributions to the plans have weighed on the company’s operations.
Sears, which filed for chapter 11 bankruptcy protection on Monday, has two pension plans that held a combined $2.5 billion in assets and had a funding hole of $1.5 billion at the end of 2017, suggesting that Sears’s plans are roughly 63% funded.
For comparison, the typical pension was 87.6% funded at the end of 2017, according to the Milliman 100 Pension Funding Index, which tracks the funded status of the 100 largest corporate defined-benefit pension plans.
The Pension Benefit Guaranty Corp., the government’s pension insurer, said Monday it expects its guarantees would cover the vast majority of benefits under Sears’s plans. The plans have been frozen for benefit accruals in 1996 for former Kmart participants and in 2005 for Sears’s employees, the agency said. The PBGC, which acts as a backstop to corporate pension funds, receives no taxpayer funding and instead is financed by insurance premiums paid by pension plans.
For now, though, Sears is still on the hook. Its bankruptcy filing didn’t terminate the plans, and the retailer retains responsibility for paying its retirees.
The company has been paying into the plans this year. It made $343 million in contributions during the 26 weeks ended Aug. 4, according to regulatory filings. The plans’ assets likely have increased in value due to a run up in interest rates and stock prices.
Terminating the plans would free up cash for the company to invest in the business, and pension experts say the company may seek to do so.
Last month, Edward Lampert, who at the time was Sears’s chief executive and chairman, blamed pension payments for holding back the company, which had contributed almost $2 billion to its pension plans over the past five years. “Had the company been able to employ those billions of dollars in its operations, we would have been in a better position to compete with other large retail companies, many of which don’t have large pension plans,” Mr. Lampert wrote.
With the bankruptcy, Mr. Lampert stepped down as CEO but remains the company’s chairman.
To terminate the plans, Sears would need to demonstrate to the court it can no longer afford them. The most likely way for Sears to gain court approval would be to show it cannot stay in business or reorganize while funding the plans.
“The PBGC won’t just take over the pension plan because you want them to, said Peggy McDonald, senior vice president and actuary at Prudential Retirement. “You have to be so precariously unable to meet your obligations that the PBGC needs to step in for the benefit of plan participants.”
The vast majority of people covered by the Sears pension plans aren’t expected to see their monthly benefits reduced if the PBGC takes over the plans.
The agency has legal limits on how much it can pay out per beneficiary, but the size and scope of Sears’s plans suggest that most plan participants are below the threshold.
“The people who will be protected the most will be the rank and file,” said Eric Hananel, tax principal at accounting and consulting firm UHY Advisors Inc. Ordinary workers typically receive less of a haircut on benefits following a bankruptcy proceeding than higher-ranked executives who are due a larger pension payout.
Sears lists the PBGC as its biggest unsecured creditor in court documents, with a claim described as “unknown.” Pension experts said the agency’s claim is contingent on the company terminating the pension plans.
PBGC has additional levers to pull in a negotiation before assuming control over the pension plan. Sears had struck a pension plan protection and forbearance agreement with the PBGC in 2016 that granted the agency so-called “springing liens” on the intellectual property tied to Sears’s Kenmore and DieHard brands. Those liens would be triggered only under certain conditions, such as if Sears failed to make payments to its pension plans.
PBGC can initiate an involuntary plan term, based on factors such as a failure to meet minimum statutory funding requirements or an expectation the PBGC’s long-run loss with respect to the plan will increase unreasonably. In this case, the agency would need to decide that this scenario is the best way forward for the beneficiaries.
For now, however, the future of the plans remains unclear, industry experts said, as Sears has yet to indicate whether it will seek approval to terminate the pension plans.
Write to Tatyana Shumsky at
Credit: By Tatyana Shumsky