Ken Raschke Reports LRO Team’s Perspective On
held their third meeting of the year with Lucent executives on August 16 in
Murray Hill, NJ. I want to thank Chuck Graves, Bill Kadereit and Herb
Zydney for their efforts in preparing for and attending the three-hour
meeting with me. They devoted countless hours to research, consulted with
pension experts and lawyers in preparing their presentations and questions.
Our focus was on gaining more information from Lucent on pension and life
insurance security and endeavoring to learn what is ahead for health care
and prescription drug benefits.
We were aware when the meeting
date was established that Lucent Chairman and CEO Pat Russo would not be at
the meeting due to vacation plans. We appreciate that Pat made available
key members of her team for the meeting. They included John Hickey, Vice
President of Human Resources; Collette Chilton, President of LAMCO, a wholly
owned Lucent investment company; Bill Carapezzi, General Counsel; Steve
Kronheim, Attorney, and Mary Lou Ambrus, Group Communications Vice
Before getting into the
specifics of the meeting, I want to provide some background. LRO members
who have followed the exchanges with Lucent over three years are aware that
Lucent and the LRO have fundamentally different perspectives as to pension
plan security and retiree healthcare benefit maintenance. These differences
came to a head with the publication by Lucent in November 2004 of a “Facts”
mailing, and LRO’s response to “set the record straight.” Both may be seen
in the LRO Website Library section under the heading “LRO Activities
Archives” with the headline
LRO Sets The Record
Straight On Lucent’s “Facts” Mailing.
The LRO’s response to the Lucent mailing reiterated our deep concern about
pension fund security, specifically big losses of more than $9 billion in a
two-year period (fiscal years 2001 and 2002), transfers of irreplaceable
moneys out of the pension fund, and Lucent’s allocation of a large
majority of the pension assets to equities and other risky investments.
Lucent also declined the LRO’s request to use different auditors for
Lucent’s corporate books and the Lucent Pension Plan – permitted in current
ERISA law but posing an obvious potential conflict of interest for the
auditor that undermines retirees’ trust.
Regrettably, the additional 9 months of dialog since the November 2004
exchange of viewpoints has not lessened our deep concerns for the security
of the pension plan and other benefits.
Now I want to
turn to details of the August 16, 2005 meeting plus provide comments on the
LRO’s proactive stance on pensions, life
insurance, healthcare and prescription drugs using experts, media and every
other option available to us.
concern expressed by LRO representatives at the meeting was that Lucent
reported in a recent 10-K filing with the SEC (Securities and Exchange
Commission) that at the end of Lucent’s last fiscal year on 9/30/04 the
management pension fund based on FASB (Financial Accounting Board Standards)
calculations was $1.7 billion underfunded. (Fortunately, for represented
retirees that pension fund was $2.8 billion overfunded at the end of the
2004 fiscal year based on FASB calculations.)
The Lucent representatives discussed with us
their views as to why they consider the management pension plan to be fully
funded. Lucent’s representatives maintained that its pension plans are
fully funded under rules and regulations required by ERISA (Employee
Retirement Income Security Act of 1974). Lucent argues that its pension
funding situation is different from those facing, for example, United
Airlines in three respects: 1) Lucent does not have or use “credit balance”
dollars that allow a company to escape its funding obligations. 2) Lucent’s
pension and pension-eligible population is “mature,” thus predicting that
Lucent’s pension liabilities are shrinking. 3) Lucent has no significant
“lump sum” pension payment exposure which could draw down the pension asset
base precipitately as has happened with other companies’ plans.
representatives continued to question why the LRO has not joined Lucent in
assuring retirees that the pension plan is “secure.”
We agree with
Lucent that United Airlines’ problems are different from Lucent's. But
we're still left with Lucent insisting we believe ERISA data when just about
every regulator and legislator believes that the ERISA rules for today’s
pension plans are totally inadequate.
explanation of how the $1.7 billion deficit in the management pension plan
will be filled fell far short of satisfying us. The LRO has engaged an
actuary and other pension experts and we need more details from Lucent to
fully understand how well the pension plan is funded.
We told the
Lucent team that we remained concerned about how Lucent manages the assets
for our retirement. We explained to Lucent that it's clear to us that the
more than $9 billion loss in managing the pension fund early in this decade
led directly to the death benefit cancellation for all management retirees.
And little or nothing has changed in the way they run the pension fund.
Lucent continues to aggressively manage the pension plan in
order to seek returns that will put off having to make contributions to the
pension plan from the Lucent treasury. Lucent does not share the LRO’s
concern over the real downside of riskier investments in today’s uncertain
One of the
Lucent executives in the meeting made clear that for Lucent to have to
contribute to the pension or a benefit plans would be a “misallocation of
During our discussion on the Life Insurance Trust, we learned that Lucent
has changed the Life Insurance Trust to a Life Insurance and Health Care
Trust. In 2004, Lucent obtained approval from the IRS to take $212 million
from this trust to reimburse the company for retiree healthcare expenses.
These actions are of concern to the LRO and we have asked Lucent to assure
retirees that their Life Insurance benefit is secure. We will continue to
track this important issue with Lucent.
you know, Lucent traditionally announces its health care and prescription
drug benefit plans for the coming year in mid-to-late September. Lucent
would not disclose what it intends to do with health care and prescription
drug benefits in 2006. Of particular interest to the LRO is how the
Medicare Prescription Drug Act that cuts in on January 1, 2006 will impact
Lucent’s prescription drug plan next year—if at all. We’ll all just have to
wait until the enrollment information is released by Lucent. The LRO has a
team in place to review the enrollment form and take whatever action is
needed to insure that retiree’s interests are protected.
Lucent stated that it has three
universes of obligation—shareholders, employees and retirees—that are
inextricably inter-related. The LRO wants to make sure that retiree pension
and welfare benefits are not subservient to the other two. We want to help
Lucent recognize that they have a moral duty to retirees beyond the legal
Ken Raschke, LRO President