PBGC, Sears Reach Chapter 11 Bankruptcy Settlement

Deal cleared way for court to OK ESL Investment’s $5.2 billion takeover of the retailer.

The Pension Benefit Guaranty Corp. (PBGC) has agreed to withdraw its objection to the proposed sale of Sears’ assets to hedge fund ESL Investments, which cleared the way for a US bankruptcy court judge to approve ESL founder and Sears Holdings Corp. Chairman Edward Lampert’s $5.2 billion takeover of the 126-year-old retailer.

The agreement allows the government-sponsored lifeboat for struggling pensions to assume responsibility for Sears’ two pension plans, which are covered under PBGC’s Single-Employer Insurance Program. 

Last month, the PBGC said it would assume responsibility for Sears’ 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 stepped in to become responsible for the plans because it said that Sears’ continuation of the plans is no longer viable.

According to court documents, the PBGC estimates that the Sears pension plans are collectively underfunded by approximately $1.4 billion, and have a funded level of just 64%. In its complaint, it had argued that as a result of the sale or liquidation of the company, the plans would not have assets available to pay benefits when due.

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Sears lawyer Ray Schrock reportedly told bankruptcy judge Robert Drain that the PBGC will receive an unsecured $800 million from the Sears bankruptcy estate. He also said the agency would get up to $80 million in proceeds from potential claims against ESL Investments Inc. surrounding its dealings with Sears.

The Wall Street Journal reported that as part of its settlement with Sears, the PBGC agreed not to challenge Lampert’s right to bid using $1.3 billion in debt instead of cash. It also said that a group of unsecured creditors argued that Lampert shouldn’t be able to rely on loans he previously extended to Sears when he used stock buybacks, spinoffs, and dividends to make money while stripping Sears of its assets.

The PBGC said that it expects 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.

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US Treasury Approves Benefits Cuts for Two More Pensions

Mid-Jersey Trucking and Toledo Roofers become 11th and 12th funds cleared for benefits reductions under MPRA.

The US Department of the Treasury has approved benefits reductions for the Mid-Jersey Trucking Industry and Local 701 Pension Fund, and the Toledo Roofers Local No. 134 Pension Fund.  

They are the 11th and 12th pension plans to receive approval for a reduction in benefits from the Treasury Department since the Kline-Miller Multiemployer Pension Reform Act of 2014 (MPRA) was enacted into law.

Meanwhile, the New York-based Local 807 Labor-Management Pension Fund has withdrawn its application for benefits cuts, but said it reserves the right to resubmit a revised application with additional information in the future.

For the Mid-Jersey Trucking and Toledo Roofers pension plans, the Treasury Department said it has determined that both are eligible to reduce benefits under the MPRA, and that their applications satisfied the requirements of the Internal Revenue Code as added by the MPRA.

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The Mid-Jersey Trucking fund was certified by its actuary to be in critical and declining status beginning June 1, 2017, and was projected to become insolvent at the beginning of the 2029 plan year without a reduction in benefits.

According to the rehabilitation plan the pension submitted in its application, the following adjustable benefits will be eliminated for all participants with an annuity starting date of May 15, 2018, or later, and who did not earn at least 120 hours of service during each of the three years with the month immediately preceding the participant’s annuity starting date:

  • Disability benefit not yet in pay status.
  • 60-month certain guarantee.
  • Subsidized joint and survivor annuity for married participants.
  • Commencement of new retirement benefits prior to age 55.
  • Pre-retirement death, accidental death and dismemberment benefits except as required by law for surviving spouses.
  • The subsidized portion of the early retirement benefit and service pension for all years of service.
  • Post-retirement death benefits for participants and beneficiaries.
  • Lump-sum payment option for the benefits earned prior to April 1, 2012.

The Toledo Roofers plan projected that without a cut in benefits, it would likely become insolvent at the beginning of 2030.

Its benefit suspension plan eliminates any early retirement subsidy on the benefits of participants, or their beneficiaries, who retired before the plan’s normal retirement age of 65. If the benefit is greater than 175% of the amount guaranteed by the Pension Benefit Guaranty Corp. (PBGC) after the application of this step, the benefit will be reduced to 175% of the amount guaranteed by the PBGC. No reduction will apply to benefits based on disability under the pension plan’s terms.

An individual’s age affects the amount of the reduction that may apply to the monthly benefit. For example, no reduction applies to the benefits of an individual who is 80 or older as of the end of the month of the benefit reduction’s effective date.  And the closer the individual is to age 80, the smaller the benefits reduction.

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