Pension warning after Sears bombshell
Sue Earl, a 38-year Sears Canada employee, was shocked when she found out she would only initially receive 81 per cent of the value of her pension as part of the company’s insolvency process.
The 64-year-old from Cobourg had assumed her defined-benefit pension was “money in the bank,” a guaranteed amount she would receive in retirement regardless of the financial health of the failing retailer.
But then, she also didn’t think Sears would cancel the severance payments she had been receiving since her store was closed last year — that’s what happened after it filed for court protection from creditors in June.
She said the other 19 per cent of her defined-benefit pension is “up in the air.”
“Our letter said it would be paid out to us in the next five years, but that depends what they do with it, whether they wind it up or what’s going to happen,” Earl said.
“It’s just one more slap, really. You lose your severance and then you find out you might not get all of your pension money.”
Personal finance experts say the Sears case shows the risk of depending too much on a defined-benefit pension plan to provide income in retirement if the plan is not fully funded and the sponsor goes bust.
James McCreath, an associate portfolio manager with BMO Nesbitt Burns in Calgary, says employersponsored pension plans are a good thing because they force people to save for retirement but when a company isn’t healthy enough to fund them, it can result in a lot of stress for employees.
“If I had a defined benefit plan, I’d certainly sharpen my pencil on reviewing it to see if there’s an unfunded liability and how that perhaps would impact my retirement,” he said.
Tony Salgado, director of CIBC Wealth Strategies in Toronto, says many don’t even know what kind of pension plan they have, much less what their retirement income might be.
“Incorporate some wiggle room,” he advises.
Defined-benefit plans promise members a retirement income usually based on salary and years of service. But an aging population and low interest rates have increased funding requirements, leaving many plan sponsors with a shortfall.
Sears has been paying $3.7 million a month to top up its underfunded defined-benefit plan, as required by Ontario provincial law, but has asked a court to allow it to suspend those payments while it restructures.
Meanwhile, Ontario has proposed new rules that would see definedbenefit pension plans it regulates not require topping up as long as they are 85-per-cent funded, down from the current 100 per cent.
In Cobourg, Earl says she is receiving employment insurance benefits and has started her Canada Pension Plan payments early to top up her RRSPs and pay down debt.
Her husband, Ralph, has a small pension and, after a “hard look at our finances,” she thinks they’ll be OK.
“I mean, we’re going to have to be careful with our money.”