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Aug 14, 2017

Commercial bankruptcy could affect generous pension plans

When companies can go bankrupt, this process has multiple effects on employees, creditors and leadership. But few people know what happens to generous employee programs such as pension plans when companies go under. The recent news about Sears' high-profile bankruptcy has created questions in the minds of many people in Ontario and across Canada about how pension plans may be affected by commercial bankruptcy.

This is an issue experts say many Canadians should be more aware of. The Financial Services Commission of Ontario (FSCO) reports that thirty percent of such generous pension programs, like the one offered by Sears, are currently underfunded. For companies behind in pension payments, this can mean big consequences for employees if commercial bankruptcy comes into play.

For Sears' part, they will be paying out some of the promised pensions but halting others, meaning the retirement income for beneficiaries will likely be reduced. Those who work for other companies with similar plans, called "defined benefit" plans, could face a similar fate if their company declares bankruptcy. These plans guarantee a level of lifetime retirement income. The FSCO research shows that nearly one third of these plans are currently running deficits.

As retailers struggle to compete in a changing marketplace, other companies like Sears may be forced to close their doors. When this happens, commerical bankruptcy laws will determine how creditors, employees and stakeholders are treated during the transition. Employers should consult a lawyer about their obligations in the case of such events and consider the possibility of bankruptcy when planning and funding employee programs.