When Keith Lovell left Sears Canada Inc. in 1998 after 30 years with the retailer, he knew his retirement years would not be easy.
Money was tight in the Lovell household. As a food services supervisor and, later, a sales manager in Fredericton, he had always earned a relatively modest salary. His wife, Beverly, suffered from fibromyalgia and depression and required medications to help battle her ailments.
At the very least, the couple had a nest egg they believed they could count on. For decades, Mr. Lovell had paid into a mandatory company pension plan and – crucially – was entitled to health benefits in retirement. The Sears pension and benefits package was the core of their financial plan. He had no reason to think his employer would not follow through on its end of the deal.
Since the retailer's stunning collapse into bankruptcy this year, however, Mr. Lovell's life has been turned on its head.
By October, Sears had stopped paying benefits to him and other retirees, including prescription, dental and life insurance coverage for him and his wife. And because the company had left its defined-benefit pension underfunded by $266.8-million upon windup, Mr. Lovell could face a reduction of 20 per cent or so in his $585 monthly pension – once a raft of legal issues are resolved about who gets the money from the company's liquidation.
What infuriates Mr. Lovell and other retirees is that over nine of the past 13 years, Sears Canada's board of directors approved paying shareholders billions of dollars in special dividends from the proceeds of asset sales – even while the retailer struggled and, for many of those years, the pension plan remained underfunded.
"I think it's disgusting," said Mr. Lovell, 74, who lives with his wife and mother-in-law just outside of Fredericton. "For me, it's going to be tight. We get the bills paid – and that's pretty well it."
He's not alone feeling the squeeze among the company's 18,000 retirees and 16,000 employees, who by early next year will all be laid off without severance when the retailer closes for good.
They're angry that Sears was run down to the point that, by early this year, it was rapidly burning through cash and was forced to borrow $300-million under a new strategy and leader, who had been a close associate of Edward Lampert, the founder and chief executive officer of the U.S. hedge fund that was Sears Canada's biggest shareholder. Mr. Lampert is also CEO and controlling shareholder of Sears Holdings Corp. of Hoffman Estates, Ill., which controlled Sears Canada until 2014.
In a campaign that began after Mr. Lampert took control, Sears Canada sold off valuable assets such as its credit card division and prime store leases, raising almost $3.8-billion. Between 2005 and 2013, it returned almost $3.5-billion to shareholders through special dividends and share buybacks, according to court documents. Entities controlled by Mr. Lampert were significant beneficiaries of those payouts.
Retirees such as Mr. Lovell see a direct link between the long-term sell-off of the company's best assets and its failure to survive. And many others believe the Sears example exposes, once again, big gaps in the regulation of pension funds in Canada. How, they ask, can a company sell assets worth billions of dollars yet still not be able to meet promises to former employees about pensions and medical costs?
"It is very sad and unfortunate that the Sears board didn't raise the types of questions that the employees are now raising," said Richard Leblanc, a York University law professor who specializes in corporate-governance issues. "The board potentially breached its fiduciary duty because it gave primacy to shareholders."
The situation is especially tough for retirees who had banked on their Sears pensions because many of them forfeited opportunities to contribute to other retirement savings plans.
"People have certain expectations. They live their lifestyle based on those expectations," said Keith Ambachtsheer, director emeritus of the International Centre for Pension Management at the University of Toronto's Rotman School of Management. "And, boom, the world changes."
Mr. Lampert says public companies typically distribute cash to shareholders through dividends and share repurchases, "especially when there is cash available significantly in excess of the company's operating needs."
In October, he told The Globe and Mail he had not supported Sears Canada's most recent strategy and had raised concerns, particularly about the "risky and unwise" borrowings earlier in the year.
"The liquidation of Sears Canada was not a foregone conclusion," he said in his e-mailed statement through his ESL Holdings hedge fund. "A less risky strategy, while not without its own difficulties or risks, could have avoided the unfortunate conclusion.
"The losses suffered by ESL and other shareholders were certainly significant, but so too were the job losses and other costs borne by the various constituents of Sears Canada," his ESL statement said.
In a subsequent blog posting, Mr. Lampert said that between 2005 and 2015 Sears Canada "reduced its outstanding debt to negligible levels and returned excess capital to shareholders, while maintaining a meaningful amount of cash in the business."
Today, uncertainty lingers over whether the underfunded pension will be topped up in the retailer's insolvency procedures under the Companies' Creditors Arrangement Act (CCAA). Sears liquidation sales continue until next month, when the chain will close its remaining 69 stores across the country (down from 255 in June) and move on to tallying creditors' claims.
The retirees say they should be a priority in the CCAA recovery payments based on legal precedent. But other creditors are expected to object to pensioners getting first dibs on whatever money is left from the sale of the retailer's remaining assets and inventory.
Among those who intend to challenge the retirees are more than 250 former Sears Hometown store operators, who argue that, as creditors, they should have equal access to any recoveries. In 2014, the Hometown dealers won class-action status to a $100-million lawsuit that claimed Sears made it virtually impossible for them to run their outlets profitably. About a year earlier, the Hometown operators legally challenged Sears for declaring an extraordinary $509-million dividend after the struggling retailer sold assets such as its Toronto Eaton Centre store lease, alleging the move would eventually lead to a formal insolvency of Sears to the detriment of creditors.
"We have a lot of sympathy for the plight of the retirees," said David Sterns at Sotos LLP, the lawyer for the store operators. "But Hometown dealers are in an equally bad or worse position. In fact, they don't have any pensions at all. … They're in a very, very bleak situation right now."
Simpsons-Sears Ltd., the predecessor of Sears Canada, set up the defined-benefit pension plan in 1976, one of a number of initiatives to help the retailer attract and keep the best employees, said William Turner, a long-time Sears executive and retiree representative, in a court document. By then, Sears had become the country's leading department-store retailer. The company made it mandatory to join the plan and make regular contributions as a condition of employment. It meant employees were motivated to reduce any RRSP contributions, leaving them highly dependent on the corporate pension for their retirement income.
"The philosophy was that an employee may make more money elsewhere but Sears Canada offered the guarantee of a secure future," said Mr. Turner, who started as a trainee at a Sears store in Ottawa in 1966 and retired 36 years later as president of merchandising, marketing and logistics after having also been a board member from 1992 to '97.
"Historically, Sears Canada had a culture that not only brought the company success but enriched the lives of its employees," Mr. Turner said. "Its philosophy was also 'to care about and take care of your employees and they will care about the company and take excellent care of your customers.'"
After 2005, when Mr. Lampert became the major shareholder of Sears Canada, Mr. Turner's Store and Catalogue Retiree Group grew increasingly worried about the retailer's financial deterioration, significant asset sales, hefty dividends to shareholders and drastically reduced investments in the company, Mr. Turner said.
Worst of all, the pension plan, after having had a surplus of $65-million by the beginning of 2005, had a deficit of $199-million by the end of 2011, according to court documents.
Mr. Turner's group, of which he is president, raised its "serious" concerns about the pension plan's underfunding and "the inevitable financial collapse of Sears Canada" with the retailer's executives, the federal and Ontario governments and the Financial Services Commission of Ontario, an agency that regulates pension plans – to no avail.
Still, Mr. Ambachtsheer, the pension expert, notes that companies have been shifting away from defined-benefit pension plans toward defined-contribution pensions, in which the risk moves from the employer to the employees. In 2008, Sears switched to a defined-contribution plan, although employees retained the defined-benefit pensions they had earned until then, to be paid out when they retired.
He says he doesn't want to underplay the hardship for Sears retirees who may get less than they had anticipated. "It's a shock. But in the general scheme of things, other people can be in much worse situations – people without corporate pension plans at all."
Even so, the current situation leaves a lot of uncertainty as to how things will play out for the Sears pensioners, he says. "I can totally understand the frustration of that."
Even before Sears's failure, the
Lovells could barely make ends meet. Now they have expenses that were previously covered by Mr. Lovell's company benefits, including a 25-per-cent discount on purchases at Sears stores, which helped with buying gifts for their five grandchildren.
Their combined monthly income is currently $2,965, which includes his $585-a-month Sears pension as well as their Canada Pension Plan and Old Age Security. But their monthly costs now exceed that income by more than $230 a month, leaving them scrambling to find savings.
"The government talks about the middle class. Why aren't they protecting not just the middle class but those in the lower part of the middle class who worked 25 to 30 years for a company?" Mr. Lovell said. "There's no protection."
A former chef from Britain, he started at Sears as a buyer in food services in Toronto and became assistant manager in the food-services department, which oversaw cafeterias at the head office and in stores. He remembers the excitement of organizing a reception for Olympic athletes at the former, and distinctive, upside-down-pyramid-shaped head office on Jarvis Street in 1976, when Sears sponsored the athletes' uniforms.
"It was always a good company to work for," he said. "They paid more than the competitors for staff because they wanted to get better staff than their competitors. Employees were important to them."
After 10 years in Toronto, he moved to Fredericton with his wife, who was from there and had worked for archrival T. Eaton Co. until she left to raise their children. He got another job at Sears and worked his way up in management in the electronics and furniture department, winning a couple of internal achievement awards before taking early retirement at 60 in 1998, when he earned $36,900 a year.
Since then, he and his 65-year-old wife counted on his medical, dental and life-insurance benefits until they were cut off in October. The package helped him through four hip surgeries over the past few years, including one in 2014 that afterward required an antibiotic that cost $9,000. Now he will miss the coverage, particularly for his wife's medications, eyeglasses and dental work. They have a $65,000 mortgage on their house and monthly payments of about $430.
He said with tongue in cheek: "I'll have to start the old printing press down in the basement and get some new $50 bills. … We don't have a basement, so that's the first problem. It's not the best picture one would want to have."
As a single mother of five, Ella O'Donnell got her first job at a Sears store in Calgary in 1966, working part time in the men's wear department, but soon she was clamouring for full-time work. She got her wish, moving on in various full-time jobs, including managing "notions" – sewing and knitting items, a section that was dropped long ago – in her 25-year career at the retailer. She retired in 1988, when she earned about $10,800 annually, although she stayed on part time for another three years.
Today, at 86, she still keeps in touch with former employees at twice-a-year lunches and regular bowling outings. But she gets angry when discussing the decline and demise of Sears and how the company sold assets and paid generous dividends to shareholders – Mr. Lampert included – while leaving the pension underfunded.
"It was just disgraceful," said Ms. O'Donnell, who lives alone in a one-bedroom apartment in Calgary and is on a waiting list for a subsidized seniors' home. "It breaks my heart to see what's happening."
Now, facing the possibility that her own Sears pension payments of $174 a month could be scaled back in the CCAA process, she worries about how she will manage. Suffering from arthritis, she recently had blackouts and breathing problems – she wears a pacemaker – and she is anxious.
"It could be the stress with what's happening with our pensions," she said. "Subconsciously, it's on my mind."
About a year ago, she moved into a smaller apartment, her monthly rent dropping to $995 from $1,300. For 17 years, she got a $340-a-month break on her rent by managing the building, but she gave that up last year.
A couple of years earlier, she accepted Sears's offer to pay retirees a lump sum in exchange for cancelling their health benefits, getting about $5,500. With a total annual income of almost $23,400, including OAS and CPP, she qualifies for Alberta Seniors Benefit supplements. She also gets help from her daughters: One of them pays for her cable television, and another covers her cellphone charges.
But she expects to feel the pinch of a reduction in her pension. "Anything you lose in income when you're retired – you do notice it, you can't help it."
For Donna England, 74, who retired from Sears Canada in 2003 at the age of 60 after 42 years with the retailer – then worked an extra three years after her retirement – Sears was a "phenomenal" place to work.
Like many of her co-workers, she felt her fellow employees were like family. "The atmosphere, the management, the social aspect of the whole thing – it was really a wonderful place to work, and I was very proud to do so," Ms. England said. "That's why it's so sad that it's gone down the way it has."
She joins other retirees in having assumed that, after paying into a plan for all those years, she had earned a full pension and would get it in her retirement. And she's not alone in being afraid of what will come next. "We're all upset and not sure what's going to happen."
She watched for years as federal and provincial politicians failed to respond to retirees' pleas for legislative protections when companies get into trouble and fall behind in funding their employee pensions.
"That's sinful," she said. "It should be a law that when we pay into our pension, that pension should be topped up all the time. Don't take our money and put it somewhere else unless you're prepared to top it up when needed. You would think it would be against the law, but obviously it's not. I am angry at the way it was handled."
She moved in about a year ago with her daughter and son-in-law in Victoria. "It does help financially," she said. "But I pay my own way."
Still, she will miss the 15-per-cent discount she got on purchases at Sears stores. (Retired managers got a 25-per-cent discount.)
"It didn't matter if it was a sale or clearance item, you got the discount," she said. "Losing the discount – that kind of hurts, too." Like Ms. O'Donnell, she opted out of the health-benefits package a few years ago in exchange for a payment from Sears. When she first got the company's notice offering the benefits buyout, "something in the letter set off bells."
After years of buying eyeglasses only at Sears with her discount, she recently bought a pair at another retailer at a much higher price. "I used to shop at Sears all the time, and I'm not alone – I'm sure most of the employees did." At Sears, she had worked at a host of jobs, ranging from daily sales audits in an office in Burnaby to heading up purchasing at a store in Victoria and selling furniture at a Vancouver outlet. As a single mother raising a daughter, she was able to juggle work and home. "You felt comfortable, you enjoyed coming to work. I sometimes think it's not that way any more in a lot of stores."
Some of her best friends are people she worked with at Sears, and she gets together with a group of retirees a few times a year. Now they all face losing some of their pensions, "and more than likely we will," she said.
It's not the first time retirees of a failed company have faced the prospect of losing some pension funding. About 20,000 pensioners at telecom specialist Nortel Networks Corp., which went into CCAA proceedings in 2009, waited more than seven years to find out they would get an estimated 45 cents to 50 cents on the dollar of their underfunded plan.
And pension underfunding is not uncommon, says Michael Armstrong, associate professor at Brock University's Goodman School of Business. In Ontario, single-employer defined-benefit plans are short $37-billion in total, and only 18 per cent are fully funded, according to recent FSCO data. (Those numbers exclude plans serving multiple employers, such as the Ontario Municipal Employees Retirement System.)
In the wake of Sears's troubles, Ottawa has come under growing pressure to take steps to protect its employee pensions. David Macdonald, senior economist at the Canadian Centre for Policy Alternatives, cites the Sears case as a cautionary tale for Canadian pension regulators about U.S. investors stripping Canadian companies and leaving pensioners – and Canadian creditors generally – to pick up the pieces in an insolvency. The centre recommended last month that company payments to shareholders such as dividends and share buybacks be limited if pension plans are underfunded.
Federal Innovation Minister Navdeep Bains said the government would consider legislation to protect employees' pensions after two private member's bills were put forward by the NDP and the Bloc Québécois aimed at giving pensioners priority in insolvency recoveries. But a spokesman for Mr. Bains says pensions are a provincial matter and that he is working to co-ordinate programs for the pensioners. "Our heart goes out to all those affected by the closure of Sears," the spokesman said. (Ontario Finance Minister Charles Sousa could not be reached for comment.)
Prof. Leblanc, the governance specialist, says companies shouldn't be paying out money to shareholders while leaving retirees' pensions underfunded. Corporations in Canada have a fiduciary duty to all stakeholders, not just shareholders, and the laws should make that duty more explicit, he says. Employees should even have a formal role in corporate governance, such as a seat on the board, he adds.
In Sears's case, the retailer put shareholders' interests before those of retirees, he said. "It calls into question whether the laws need to change – I think they probably do."