18 PART I Introduction to Business and Society 1.1 SEARS CANADA'S BANKRUPTCY AND PENSIONERS 4, V. ployment contract. The expecm nt lifestyle and security fer warning of a crisis in the ensions will have Most Canadians expect employers to provide pensions as one benefit of the em. tions include not only coverage but also adequate funds to maintain a desired retireme the longevity of the pension. Government officials and financial industry spokespersons are. . ' pension system, especially pensions in the private or business sector. Some claim that the Cl'lSlS in p a negative impact on overall economic efficiency. The two most common types of pension plans are defined benefit and . _ plans guarantee a retirement payment based on income level and years of service. The risk of return and. longevity is assumed by the employer; that is, the employer is responsible for deficits in the plan. The defined benefit type IS the most common, but this type is experiencing a major problem: there are insufficient assets to support the payment of pension obligations to retired employees. The deficits in the plans have resulted from lower interest rates reducmg earnings, stricter standards imposed by government regulations, and higher costs or payouts. . In dened contribution plans, employees and employer make contributions in registered retirement saVIngs plan (RRSP)type accumulation accounts, with employees allocating the funds among investment alternatives. The risk of return and longevity is transferred to individuals, something with which Adam Smith would,most likely agree. The difficulty is that individuals are less able to bear the risk of failures and they are less knowledgeable of investment opportunities and dangers. Also, there is a possibility they will pay financial advisers too much to guide them in the investment process. Dened benefit plans are particularly problematic when a business goes bankrupt, as Sears Canada did in January 2018. The 18,000 pensioners learnt that their pension plan was underfunded by $270 million. This meant that their pension payments would be reduced by 20 percent. In August 2018, the payments were actually reduced to 30 percent. The questions became about what Sears' pensioners could do. The pensioners argue that bankruptcy laws favour corporations and management. In mostjurisdictions, creditors have priority over pension funds, so any re- maining funds could not be accessed to fund the $270 million shortfall. For years, governments have discussed the possibility of changing laws to give pensions a priority over creditors, referred to as super priority ranking. The argument against this is that it would upset the delicate financial balance that protects bankers and other creditors. As a result, companies may have less credit available to survive and grow, as lenders would become more reluctant to lend. Another proposal is to have governments back the pensions in case of bankruptcy. The Ontario government has proposed that some minimum be paid to pensioners when a corporation declares bankruptcy. Other govern- ments are considering it. it is argued that governments should not bail out irresponsible employers and it would not be fair to other taxpayers. The Sears pensioners have formed Sears Canada Retiree Group (SCRG), "a not-for-prot volunteer organization committed tonthe protection 'of the company pen5ions and benets of all Sears Canada retirees and their surviving beneCiaries. SCRG. has pomted out that 'Sears' Canada 5 board has received over $600,000 in pay and another $600,000 in'profeSSions fees. In addition, finanCIal adVisers and lawyers are being paid. Also, $3 billion in dividends was paid to investors between 2005 and 2013 while the company was experiencing problems. SCRG argues that such extraordinary diVidends and any funds generated by asset stripping should be returned. There appears to be no easy solutions and SCRG continues with various legal actions, defined contribution. Defined benefit Questions