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Sears Canada to phase out retiree health care benefits

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TORONTO—Sears Canada Inc.'s decision to eliminate retiree health care benefits is unlikely to start a trend among Canadian employers.

Sears Canada also plans to introduce a defined contribution pension plan and cease employee contributions to its contributory defined benefit plan, which fits into a current trend of Canadian employers that have sought to control costs associated with defined benefit plans, consultants say. The company's plan, though, is slightly more generous than pension changes made by other employers, as it will allow current employees to continue to accrue pension benefits based on salary growth (see box).

Competitive pressures play a major role in changes made by employers to their benefit plans and Sears Canada is no exception, consultants say. "Sears is in retail, and they would have incredible pressures being in the industry, particularly (competing) with Wal-Mart," said Charlene Moriarty, a Toronto-based consulting actuary with Buck Consultants L.L.C.

In making these benefit changes, the company wants to offer retirement programs that are competitive with other retailers and allow Sears Canada to attract and retain employees, a spokesman said.

While Sears Canada is not the only Canadian company to eliminate retiree medical benefits, its decision to do so is not indicative of a trend in Canada, said Ellen Whelan, a principal at Mercer Human Resource Consulting in Toronto who focuses on nonpension retiree benefits. Most employers who are making changes to retiree medical programs are reducing the benefit, implementing caps or introducing premium sharing, she said. "There haven't been too many employers who have shut down the plans," Ms. Whelan said.

A 2006 study by Hewitt Associates Inc. found that 45% of Canadian employers offer retiree health care benefits. About 37% of these employers reduced benefits in the last three years, while 57% plan to reduce retiree benefits in the next three years, the study found. Only 4%, though, said they plan to eliminate retiree health care benefits in the next three years.

The top reason given by employers for reducing retiree medical benefits was the rising cost of health care, but the second most commonly cited reason was accounting issues. Rule changes that took effect in December require Canadian companies to account for the costs of their retiree benefits, leading some employers to reduce benefits to try to mitigate the impact on their financial statements, consultants say.

While there may be Canadian employers that will eliminate the benefit, as Sears Canada did, for financial or competitive reasons, the more common path for employers seeking to control retiree health costs will be to reduce the level of coverage so they can continue to provide the benefit on a long-term basis, consultants say.

Move to defined contribution

Sears Canada also said it will introduce a defined contribution plan and then discontinue employee contributions to the contributory defined benefit plan.

The company will fully match the first 4% of salary employees contribute to the defined contribution plan and match 50% of employee contributions between 5% and 7% of salary. "It's a very competitive plan when you consider what other options are available out there," the Sears Canada spokesman said.

The company is in a unique situation because it has many older, long-service employees, while other retailers have a younger, transient workforce, said Mazen Shakeel, a principal for Hewitt Associates in Toronto. Sears Canada was the only Canadian retailer with a defined benefit plan, which made sense because of its older workforce, he said.

The company's decision, though, to shift to a defined contribution plan reflects a general trend of employers moving away from defined benefits, consultants say. Although the majority of employees covered by employer-sponsored pension programs remain in defined benefit plans, interest in defined contribution plans has increased due to the downturn in the equities markets and its impact on pension funding levels.

"There's a more pronounced trend from DB to DC in Canada," said Fred Vettese, executive vp and chief actuary at Toronto-based human resources consulting firm Morneau Sobeco. "In the last few years, it's picked up steam."

The announcement of the move to a defined contribution plan by a company the size and prominence of Sears Canada would have an impact on other Canadian employers because they start asking themselves why they still have defined benefit plans when other companies are switching to defined contribution plans, Mr. Vettese said.

Generous approach

In amending its pension plan, Sears Canada has taken an approach atypical of Canadian employers converting to defined contribution plans because it will allow compensation growth in future years to still factor in the calculation of defined benefit plan payouts, consultants say. "This approach is probably more generous in that they are allowing people to grow into bigger benefits," Mr. Shakeel said.

While Quebec mandates factoring in salary growth to calculate future benefits for converted final average pension plans, other provinces, including Ontario, do not, Ms. Moriarty said. For a nationwide employer such as Sears Canada, it makes sense that the employer would not want to treat employees located in different provinces unequally, although it is not uncommon for employers to freeze both salary growth and service credit considerations in the calculation of future benefits, she said.