Sears Pension Plans to be Assumed by PBGC
After nearly a decade of failing to turn a profit, Sears Holdings Corporation filed for Chapter 11 bankruptcy protection on October 15, 2018. As of February 11, 2019, the Pension Benefit Guaranty Corporation (“PBGC”) is now the trustee for two Sears defined benefit pension plans. The move follows bankruptcy court approval of an agreement between the PBCC and Sears that terminated the plans as of January 31, 2019.
The Sears Holdings Pension Plan 1 had assets of $1.84 billion and Sears Holdings Pension Plan 2 had assets of $778.7 million, as of November 2017. The two plans are only 64% funded, with a shortfall of approximately $1.4 billion, as estimated by the PBGC. These numbers put the Sears plans in “critical status” under the Pension Protection Act of 2006.
The PBGC will cover the company’s two plans under its Single-Employer Insurance Program. The program is in good financial condition and is projected to significantly improve over the next decade.
The PBGC has been working with Sears to protect its pension plans for several years, so this action was expected and is reflected in the agency’s financial outlook. Pension benefits in the Sears plans have been frozen since 2005.
The plans cover 90,000 participants who are or were employed by Sears, Roebuck and Co., and Kmart Corp. Participants will be notified now that the PBGC has assumed responsibility for the plans. Current recipients will continue to be paid without interruption, and future retirees may apply for benefits when they become eligible. The agency anticipates that it will be able to fund the “vast majority” of pension benefits owed to participants under the Sears pension plans. Kmart “90 point” retirement benefits earned after the Sears bankruptcy date of October 15, 2018 may not be fully covered by the PBGC.
As part of the bankruptcy process, an auction was held to generate funds from viable Sears assets. Sears chairman, Eddie Lampert, made the winning offer to purchase the struggling chain of department stores through his hedge fund ESL Investments for $5.2 billion.
Judge Robert Drain of the U.S. Bankruptcy Court in White Plains, N.Y. announced in early February that he would approve the deal in order to keep approximately 425 stores open and save 45,000 jobs.
The PBGC originally joined numerous of creditors in opposition the chairman’s bid. Preferring liquidation, these creditors argued Mr. Lampert should not be rewarded with a chance to profit from a bankruptcy that he is, in part, responsible for.
At issue were royalties received by the PBGC from licensing agreements it has for Sear’s Kenmore and DieHard trademarks. The sale would have delivered those marks to ESL free and clear of the PBGC’s interest in them, potentially in violation of the bankruptcy code.
However, the PBGC withdrew its objection once it reached an agreement with the company. Because the details of the agreement will remain secret until disclosed by the court, it is currently unclear what concessions Sears made regarding the trademarks or other points of contention.
The PBGC is responsible for providing benefits from failed pension plans to an estimated 1.5 million people. It receives no taxpayer dollars and is instead funded by insurance premiums, investment income, and assets and recoveries from failed single-employer plans.
“Our mission is to protect the retirement income of plan participants and their families,” explained the PBGC Director. “When it’s no longer possible for plan sponsors to maintain their pension plans, PBGC plays the crucial role of providing lifetime retirement income for the workers and retirees.”
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.