NEW YORK - The Woolworth Corp.'s nearly $600 million cash balance defined benefit plan, already underfunded by about $57 million, now faces the prospect of cashing out up to 3,600 employees being laid off with the closing of 400 Woolworth stores.
The global retailer announced last month it is closing its 118-year-old chain of five-and-dime stores in the United States and laying off those stores' full-time employees to focus on its profitable athletic and specialty retailing stores.
As a result, the company expects to record an after-tax charge of about $223 million related to the store closings, including severance and related benefits costs.
According to a spokeswoman in the Woolworth financial division, an actuarial review will be conducted to determine the total liabilities associated with the laid-off workers, the amount of vested benefits, and the options available to them, which could include lump-sum layouts or annuity options.
She said until the evaluations are completed, it is not known exactly how many workers will be involved in accepting which options. She said it is likely not all of the 3,600 employees are vested and that some might be rehired because about 100 of the 400 Woolworth stores being closed will be converted to Foot Locker or Champs Sports stores.
Woolworth plans to change its corporate name later this year to reflect its specialty store chains.
The Woolworth fund is underfunded by about $47 million on an ongoing basis, she said. The company plans to address the underfunding by contributing $9 million initially, with further contributions possible once the store closings and liquidations are complete. She said most of the underfunding is attributable to the German pension operation, but was unable to elaborate. The 1996 Woolworth annual report said "substantially all of the unfunded benefit obligations represents the German pension accrual for which there are no offsetting plan assets, as permitted by local statutory requirements."
German pension funds generally follow book-reserve accounting rules. There are 374 Woolworth stores in Germany, and the company operates more than 7,500 retail stores worldwide. Only the stores in the United States were affected.
Woolworth also appears on the 1996 Pension Benefit and Guaranty Corp. list of underfunded pension plans for the plan year 1995. The PBGC list shows the Woolworth plan was underfunded by $242 million.
But according to pension industry sources, the difference might be attributable to the more conservative assumptions used by the PBGC, different plan years, and that the PBGC amounts are shown on a termination basis rather than an ongoing plan.
Marty Collins, senior actuarial consultant at the Kwasha Lipton Group, Fort Lee, N.J., said the PBGC's more conservative assumptions could account for the discrepancy between the underfunding reported by Woolworth and that reported by the PBGC.
The Woolworth discount rate was 7.5% in 1996, up slightly from 7.3% the prior year.
According to actuaries, the PBGC uses conservative discount rate assumptions in arriving at its liability and funding profiles, as much as 200 basis points lower than that used in the corporate sector.
In comparison, according to figures provided by Brentwood Asset Advisors, Santa Monica, the prevailing rate on group annuity contracts for pension liabilities is about 6.75%.
Based on precedents, it could take several months to resolve the Woolworth pension issue.
"While I can't speak to this particular case, in similar situations it can take anywhere from at least one year to as many as six or seven years to clear up the problem," said Mr. Collins.
Jim Klein, principal and consultant at Towers Perrin, New York, "two of the most important questions to be answered will be that of establishing liabilities and assets."
For example, said Mr. Klein, "Will many of the employees be taking early retirement and what effect will that have on liabilities?"
Phil Levin contributed to this story.