Sears case shows the risk of defined benefit pensions for employees

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Sue Earl, a 38-year Ontario-based Sears Canada wage-earner, was shocked when she found out she would only initially receive 81 per cent of the value of her dismiss as part of the company’s insolvency process.

The 64-year-old from Cobourg, Ont., had expected her defined-benefit pension was «money in the bank,» a guaranteed amount she’d receive in retirement regardless of the fiscal health of the failing retailer.

But then, she also didn’t think Sears liking cancel the severance payments she’d been receiving since her store was near last year — that’s what happened after it filed for court immunity from creditors in June.

She said the other 19 per cent of her defined-benefit dismiss 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 light air it up or what’s going to happen,» Earl said.

Severance gone, benefit under threat

«It’s just one more slap, really. You lose your severance and then you turn up out you might not get all of your pension money.»

Personal finance experts say the Sears carton shows the risk of depending too much on a defined-benefit pension plan to contribute income in retirement if the plan is not fully funded and the sponsor goes bust.

James McCreath, an associate portfolio overseer with BMO Nesbitt Burns in Calgary, says employer-sponsored pension blueprints are a good thing because they force people to save for retirement, but when a establishment isn’t healthy enough to fund them, it can result in a lot of stress for employees.

«If I had a defined improve plan, I’d certainly sharpen my pencil on reviewing it to see if there’s an unfunded answerability and how that perhaps would impact my retirement,» he said.

Tony Salgado, supervisor of CIBC Wealth Strategies in Toronto, says many don’t even recognize what kind of pension plan they have, much minuscule what their retirement income might be.

«Incorporate some wiggle reside,» he advises.

«If you were to take a 10 per cent haircut on what you possess through your retirement pension plan, what other proveniences of income will you have available?»

Promise of retirement income

Defined-benefit delineates promise members a retirement income usually based on salary and years of ritual. But an aging population that is living longer has increased the cost of the systems at the same time that low interest rates have also developed funding requirements, leaving many plan sponsors with a shortfall.

Sears has been repaying $3.7 million a month to top up its underfunded defined-benefit plan, as required by Ontario ungraceful law, but has asked a court to allow it to suspend those payments while it restructures.

Meanwhile, Ontario has proffered new rules that would see defined-benefit pension plans it regulates not instruct topping up as long as they are 85 per cent funded, down from the modish 100 per cent.

In Cobourg, Sue Earl says she is receiving employment security benefits and has started her Canada Pension Plan payments early to top up her RRSPs and pay down in dire straits.

Remaining pension goes to locked-in account

She has received a payout on the defined-contribution annuity plan Sears started in 2008, but is still waiting for payout of the stated benefit plan it replaced — both have to be reinvested in locked-in accounts until retirement.

Her calm, Ralph, has a small pension and, after a «hard look at our finances,» she deliberate ons they’ll be OK.

«I mean, we’re not driving Mercedes, we’re going to drive our car into the loam. If we take a trip we’re going to be budgeting for it. I mean, we’re going to have to be alert with our money.»

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