PBGC to Assume Responsibility for Sears, Kmart Pension Benefits

The Pension Benefit Guaranty Corp. (PBGC) said it will assume responsibility for bankrupt retailer Sears Holdings Corporation’s two defined benefit pension plans, which cover approximately 90,000 workers and retirees at Sears, Roebuck and Co. and Kmart Corp.

Sears filed for Chapter 11 protection in October, and the PBGC, the government-sponsored lifeboat for struggling pensions, is intervening to become responsible for the plans because it said that Sears’ continuation of the plans is no longer viable.

“Our mission is to protect the retirement income of plan participants and their families,” said PBGC Director Tom Reeder in a release. “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.”

PBGC, which is looking to terminate the Sears plans at the end of January, estimates that they are underfunded by $1.4 billion, giving them a funded ratio of only 64%, which puts them in “critical status” as defined by the Pension Protection Act of 2006.

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The PBGC will become responsible for the pension plans when Sears agrees to the termination, or a court orders the plans to be terminated. However, until that time, they remain the responsibility of Sears Holdings Corp. The PBGC said retirees can expect to continue to receive benefits without interruption, and future retirees can apply for benefits as soon as they are eligible.

Sears’ two pension plans are covered by the PBGC’s Single-Employer Insurance Program, and benefit accruals under the plans have been frozen since 2005. Unlike the agency’s multiemployer program, the PBGC’s single-employer insurance program is in relatively good shape, as PBGC simulations show significant improvement in its projected net position over the next 10 years.

The PBGC said it expects that its guarantees will cover the vast majority of pension benefits earned under the plans, and added that it will not have a significant effect on its financial statements because the claim has already been included in the agency’s fiscal year 2017 and 2018 financial statements.

On Jan. 17, Sears reported that privately owned hedge fund ESL Investments, Inc. was selected as the winning bidder in the company’s auction, and will acquire substantially all of the company’s assets for approximately $5.2 billion. The hearing to approve the sale is scheduled for Feb. 1. The company said that if the acquisition is approved, it would preserve approximately 45,000 jobs.

Tags: Kmart, PBGC, Pension, Sears

State Street Global Advisors (SSGA) CEO Cyrus Taraporevala has sent a letter to more than 1,100 public companies calling on their corporate boards to place a greater emphasis on corporate culture, and offered a framework for implementation.

According to SSGA, an increased focus on corporate culture is essential to a company’s sustainable, long-term value creation.

“What we found is that the engagement culture in the US is starting to get very strong,” Rakhi Kumar, SSGA’s head of ESG investments and asset stewardship, told CIO. “It’s about a conversation between investors and management on issues which are not only short-term performance driven.”

In the letter, Taraporevala acknowledges that unlike its active investment strategies where SSGA can sell a company’s stock when it disagrees with management, its index-based strategies require it to own the stock for as long as it is included in the index. However, the firm still has some recourse to affect change at companies.

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“We always have the proxy vote,” said Kumar. “Companies are beginning to recognize that we can be a trusted partner and someone who’s going to be there for the long haul … but outside of that, we can’t sell the stocks. We can’t make the S&P 500 the S&P 499.”

Taraporevala emphasized in the letter that the firm’s interest in corporate culture is strictly from the perspective of long-term investment value, not from any kind of political or social agenda.

“It would be political if we were making value judgments on culture,” said Kumar. “What we are saying is good culture is one that is aligned to strategy and helps you achieve strategy, and is an asset,” she said, adding that “bad culture is one that is not aligned to strategy or can hinder the achievement of a strategy. That to me is a very simple business issue.”

While Taraporevala’s letter was directed to company boards, he said that SSGA believes it is not the responsibility of the corporate board to manage a company’s culture, but it is the responsibility of senior management.

However, Kumar said that the letter was directed to board members because boards need to monitor senior management, and that boards are responsible for overseeing strategy. “That’s the point we’re trying to make,” she said.

SSGA also acknowledged that corporate culture, like other intangible assets, is difficult to measure and manage. However, in the letter, Taraporevala cites an Ernst & Young report that estimates that intangible assets such as culture average 52% of an organization’s market value, and as much as 90% in some sectors.

“Researchers have documented that in the US and UK now, more value is driven by intangible, rather than tangible, assets,” wrote Taraporevala. “However, through engagement, we have found that few directors can adequately articulate their company’s culture or demonstrate how they assess, monitor and influence change when necessary.”

Tags: Corporate Boards, Culture, Cyrus Taraporevala, State Street