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HOFFMAN ESTATES, Ill.-Sears, Roebuck & Co., for decades known for the generosity of its employee benefit plans, is cutting back.
The nation's second-largest retailer said last week that employees who retire after 1999 no longer will be eligible for the company's contribution to premiums for a supplemental health benefits plan when they become eligible for Medicare at age 65.
The plan provides prescription drug coverage, an extremely valuable benefit to retirees, because Medicare does not cover drugs except to patients while being treated in a hospital. It also provides some home health care benefits.
In addition, life insurance for some retirees is being cut back. Retirees now get an average of $17,000 in insurance, Sears executives said. Those who retired between Jan. 1, 1978, and Dec. 31, 1997, will see their life insurance amount drop 10% a year over 10 years, and those retiring after the turn of the century will get no company contribution to life insurance at all.
For those retirees whose life insurance will be reduced, Sears will offer replacement term life insurance at a group rate and without cash assistance from Sears. The company has 133,000 retirees, 84,000 of whom will be affected by the life insurance changes.
Sears also is trimming health benefits for pre-65 retirees. Next Jan. 1, the individual and family deductibles in certain medical plans will rise to $300 and $900, up from the current $250 and $750 deductible levels.
While Sears is not the first employer to eliminate its portion of contributions toward retiree health care premiums-albeit for future retirees and only for those eligible for Medicare-it is one of the largest companies to do so.
Sears says its actions are necessary to control costs. Even with the changes, its benefit package remains richer than competing retailers, its top executive says.
"We know a lot depends on how well we manage costs. Our retirement benefit package remains better than that of retail competitors, but the cost of those benefits is out of line," said Sears Chairman and Chief Executive Officer Arthur C. Martinez in a letter to employees.
Retiree costs of all kinds have been racing ahead at an unreasonable clip, added James Bronson, Sears' vp of benefits.
While the elimination of the retiree health care benefits plan will affect future retirees, Mr. Bronson said the company's approach shows appropriate concern for workers.
"We feel we're taking a very compassionate approach to our employees," he said, referring to the advance notice of the changes and that employees who retire in the next few years will retain the company-provided health care plan.
Sears' benefits options for employees should be viewed as a whole, Mr. Bronson said, to see how much better they are than other retail stores. In addition to its health care plans, the company has a 401(k) plan with a company match and an reinvestment program in Sears stock, he said.
Sears' action is not unheard of at a time when retail corporations are being pressed for profits and are searching for ways to cut back, said Barry Barnett, a principal with The Kwasha Lipton Group of Coopers & Lybrand in Fort Lee, N.J. Nearly all other retail giants have provided less generous benefits than Sears, Mr. Barnett said.
Still, huge companies such as Sears, with 300,000 employees, have gained a certain image of stewardship for their workers that actions such as those Sears plans could erode, he said.
"It definitely changes the image of the benevolent retailer who protects its workers," he said.
Sears would not say just how much the changes are expected to provide in savings, but the extremely high accrued post-retirement cost figures "give you an idea," a Sears spokeswoman said. The accrued post retirement benefit cost in the balance sheet for Sears at the end of the year-an accounting measure for the burden of expected future retirement obligations-was $2.75 billion last year, according to Sears' 10K statement filed with the Securities and Exchange Commission. Sears had 1996 revenues of $34.93 million.
That load, Sears officials believe, could interfere with desired financial recovery. While eliminating retiree health care benefits is an unusual step for a company the size of Sears, the blow of the elimination for many retirees will be eased by changes mandated by budget legislation passed earlier this year by Congress.
Those changes will increase federal payments in many parts of the country that agree to provide Medicare coverage to retirees. In some parts of the country-especially Southern California and South Florida-federal payments to so-called Medicare risk HMOs already are so high that the HMOs are providing a rich benefit package and are not charging retirees any premiums.
It is possible, legal experts say, that employees and retirees could sue Sears for cutting back benefits. As the pendulum of case law swings backs and forth, the reduction of benefits such as that being attempted by Sears becomes "a tricky question," said Nancy Ross, a partner with the law firm McDermott, Will and Emery in Chicago.
Still, companies like Sears that make changes for future retirees are going to be on more solid ground than for those who make changes affecting current retirees, Ms. Ross said.
And companies have prevailed in suits involving changes to retiree health care benefits if they have reserved the right to amend benefits and have told employees that benefits can be altered or eliminated.
Sears' Mr. Bronson said the company has told its workers regularly that benefits are subject to change.