Sears Strikes Pension Deal, Prepares for the Worst

By Investopedia | Original Source

Despite putting on a brave front for so long, even Sears Holdings (NASDAQ: SHLD) itself seems willing to admit there is a good chance the company does not survive its current struggles. Sears inked a five-year deal with the federal Pension Benefits Guaranty Corp. to salvage the pensions of some 200,000 employees if it was forced to terminate the plan. Although the PBGC says the retailer is currently making the necessary minimum payments, Sears does not have enough assets left to cover the liabilities if it ended the plan.

Failing companies often terminate their pension plans to alleviate their liability, instead putting the onus of the obligation on the taxpayers. Although the PBGC is funded by premiums paid by employers and does not receive taxpayer funds, it also has a combined deficit, or unfunded liability, of $76.3 billion — an all-time record high, rising 24% in one year. It would take only a few large companies failing simultaneously to wipe out the agency’s ability to pay and necessitate federal assistance.

In its 2015 annual report, the PBGC says it is on the path to insolvency itself, and that by 2025, its risk of default is higher than 50%. Over the next 20 years, there is an even more alarming 90% chance it will be insolvent.

Under its agreement with the PBGC, Sears says it agrees to protect the assets of subsidiaries that hold real estate as well as its intellectual property assets, but they will have attached to them so-called “springing liens”, which will be triggered if Sears stops making pension contributions, prohibits a transfer of ownership in the subsidiaries, or terminates its plan. They would also be triggered if Sears or the subsidiaries go bankrupt.

Sears has a significant unfunded liability in its pensions, and its contributions to the plan continue to grow. The company contributed $299 million in 2015 but expects to see that grow to $314 million this year — payments could hit approximately $416 million next year.

While the deal with the PBGC provides a bit of assurance for both the agency and for Sears, it is clear that even the retailer sees the need to prepare for what had at one time been considered unthinkable: its eventual demise.

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Rich Duprey has no position in any stocks mentioned.