When companies go out of business, the extent of loss is significant. Sears Canada is yet another large retail provider that has made (or been forced to make) the unfortunate decision to close all of its services due to a lack of economic sustainability.
Along with all of the negative media exposure that came with Sears Canada’s inability to pay its employees their rightful severance and notice provisions, their existing pension plans are also in deep trouble.
According to a recent news item reported through Global News, Sears Canada had a Defined Benefits plan for its employees. What has come to light is the lack of funding on the part of the employer for that plan. The employer was obligated to provide financial support for the plan in order to ensure that the level of defined benefit would be available as required for employees once they moved into retirement and accessed their guaranteed pension funds.
This funding is not in place. What is more alarming, according to this news story, is that 30 % of companies in Ontario and an undetermined number in Quebec are in the same unfunded condition.
Click here to access the news story.
The article states that a defined pension plan provides for a set amount of funds to the retired employee, ‘at least in theory’. What we must learn from this example is that pension plans cannot be theoretical. The need is real for ongoing economic support, once employees make the decision to live on the income they think they have been promised, from their long-term employer.
There is another harsh lesson learned from this particular case. It reinforces the need for solid compensation planning, monitoring and adaptability on the part of the employer. Would the former employees of Sears Canada be better off if their employer had communicated the risks of the unfunded pension plan? Could some different decisions have been made before it was too late for those employees who envisioned a retirement plan based on a guaranteed level of income?
These are indeed theoretical questions that do little to help those employees facing poverty in retirement. This is a case of much too little, much too late.
Discussion Questions:
- How would you communicate the risks of a Defined Benefits Plan to employees in your organization?
- What steps could you put into place as a Compensation Manager to ensure that employee pensions are not in jeopardy?
- Identify the differences between a Defined Benefits Plan and a Defined Contributions Plan in order to convince your current employer to implement the one that is best for your organization.