To LRO Members:
I want to bring you up to date on what your LRO leaders have been doing to learn as much as possible about the Lucent and Alcatel merger and determine what our options are for safeguarding our pensions, health care and life insurance benefits.
I described in the LRO newsletter that was issued in late April how we made known through a news release what our initial reaction was to the announcement of the intended merger. We called for government leaders to hold Lucent and Alcatel accountable for the security of the Lucent retirees’ pensions and benefits. We also stated our view that an independent entity should be appointed immediately to ensure that whatever action the merged company intends to take with regard to the pension plan is proper, and that details are made public to ensure they are in the best interests of retirees. (Click here to read the Spring 2006 LRO newsletter.)
On April 26, I sent a letter to Lucent Chairman and CEO Pat Russo and Alcatel Chairman and CEO Serge Tchuruk. A number of LRO leaders spent several days doing research and drafting the letter and its three-page attachment.
The letter presented the following questions to Lucent and Alcatel:
· What entity will inherit the ERISA fiduciary obligations?
· Who will be the named fiduciaries?
· Will fiduciaries and plan assets be under the jurisdiction of U. S. courts as required by ERISA law?
· Will the current Lucent pension plans be merged with other pension plans and, if so, what are the merger terms?
· Will the new Alcatel-Lucent board become a named fiduciary and thus set asset investment policy and guidelines for administering plan assets?
· Will current plans retain present registration identity, and will Form 5500s be produced as required by ERISA?I urged Lucent and Alcatel to make a full disclosure of their plans for the future security of retirees’ pensions and benefits a top priority. I stated in the letter the LRO’s belief that the merger process presents an opportunity for Lucent and Alcatel to voluntarily replace the current fiduciaries of the Lucent pension and benefit plans with individuals completely independent of the merger entity. Especially needed are independent fiduciaries to oversee the Lucent LRIP Plan 001, the Management Pension Plan, who will – as ERISA law requires:
“discharge…duties with respect to a plan solely in the interest of the participants and beneficiaries and for the exclusive purpose of providing benefits to participants and their beneficiaries.”
I further stated the following four requests:
Without independent fiduciaries, the LRO is concerned that retirees’ pensions and benefits will continue to erode and assets will run out while the retirees and their dependents are still depending on them for their financial well-being. Therefore, the LRO requests that:
1. Independent fiduciaries be appointed prior to the merger to ensure that whatever actions the merged company intends to take with regard to the management pension plan are proper; and that details are made public to ensure they are in the best interests of retirees. (It appears that active union employees’ and formerly represented retirees’ pension and healthcare benefits are at less risk given their projected pension plan’s surplus assets and bargained-for healthcare benefits, subject to passage of enabling legislation.)
2. Lucent and Alcatel commit to publishing full financial and actuarial data pertaining to the management pension plan that shows the basis for current levels of funding in such detail that an independent actuary can verify the funding levels.
3. Prompt action be taken to initiate a strategy that will bring the funding level of the Management Pension Plan P-001 to 100 percent before the merger. This plan currently is under- funded by $1.2 billion based on the FASB (Financial Accounting Standards Board) calculation rules that Lucent reported to the SEC (Securities and Exchange Commission) on December 14, 2005. We trust that merger valuations were made on the basis of FASB and /or IASB rules. If this plan is not fully funded, 2007 FASB balance sheets will reflect a negative effect on shareholder equity by approximately $1.2 billion. Pension reform legislation, when passed, will no doubt result in a published ERISA funding level closer to the FASB calculation as published in the 2004 10K.
4. In a June 2, 2004 letter to me, Bradley Belt, PBGC Executive Director, encouraged Lucent retirees to monitor the financial health of their pension plan. But he noted “unfortunately, at the moment, the only current pension funding information available to plan participants is found in corporate financial statements. These filings do not measure whether the plan is fully funded on a ‘termination basis’—that is, they do not tell participants whether the plan would have sufficient assets to guarantee payments of full promised benefits in the event of a corporate failure.” The LRO wants to know the status of the Lucent Management Pension Plan on a termination basis.
In closing my letter, I stated the LRO is prepared to work with the proposed merger entity in the establishment of independent fiduciaries and the accomplishment of the action items recommended. Our three-page attachment to the letter presented specific examples of decisions by Lucent fiduciaries that have caused the LRO to believe that retirees, especially non-represented management retirees, have not had a fiduciary advocate when decisions impacting pensions and benefits were made. (Click here to read the entire letter and attachment sent to Pat and Mr. Tchuruk.)
On May 6, I received a letter from Pat Russo on behalf of herself and Mr. Tchuruk in response to my letter to both of them. (Click here to read Pat’s response.) I am disappointed that Pat did not address the LRO’s request for independent fiduciaries and our other three requests listed above. Neither did she specifically respond to our 12 questions. However, I was pleased to read Pat’s statement providing assurance that the merger team is “paying particular attention to pension, health care and life insurance benefits.”
I have written back to Pat saying the LRO would like to have its members support the merger, but believe we first need more information before we could consider making that recommendation. In order for the LRO to better understand the work that is being done on behalf of retirees in connection with the merger, I proposed a meeting with Pat, her key Lucent merger team members and a few LRO leaders. I explained that we want to become better equipped to respond to questions we are receiving from LRO members about the future of their pension and benefits. I’m awaiting Pat’s response to my June 19 letter. (Click here to read my letter to Pat requesting the meeting.)
When we learn more about the Lucent and Alcatel merger and its potential impact on the future of retirees’ pensions and benefits, the LRO Board will make a recommendation to LRO members who are Lucent shareowners on how they should consider voting on merger proxy proposal. When Lucent sends out the ballots for its September 7 shareowners meeting in New York City, please delay casting your vote until you receive the LRO’s recommendation.
In addition to attempting to gain information and commitments from Lucent and Alcatel, a number of LRO leaders have been spending a considerable amount of time studying and receiving expert counsel from attorneys on how ERISA (Employee Retirement Income Security Act) laws will continue to govern the Lucent pension plan after the merger with Alcatel. We have also consulted with an attorney who is an expert in mergers and acquisitions.
The LRO is fortunate that Chuck Graves and Mike Bard, who are retired Lucent attorneys with extensive legal experience, have generously contributed their time and expertise in helping other LRO leaders understand what laws will apply to the Lucent and Alcatel merger and what the merged entity can and cannot do in the future with regard to our pension plan. Chuck arranged for a two-day meeting of the LRO Executive Committee in Austin, Texas on June 13 and 14 where we discussed for four hours with an attorney with extensive expertise in ERISA law and another attorney who is a law and business professor at the University of Texas. He is a recognized authority on mergers and acquisitions. In addition, we had a conference call with the LRO’s attorney who is also steeped in ERISA law.
We learned from the ERISA attorney and the LRO’s attorney that Lucent, as the U.S. subsidiary of France’s Alcatel, must continue to abide by the same ERISA pension laws as it has in the past as an American company. Lucent will remain the plan sponsor of the Lucent pension plans. Therefore, there should be no change to Lucent’s pension funding obligations under ERISA, including a requirement that would cause Lucent to add funds to cover any new employees or retirees transferred to Lucent USA from Alcatel USA. In addition, Lucent has stated it will continue to honor the commitments made to its unions in the 2004 collective bargaining agreement which includes provisions for pensions and benefits for formerly represented retirees.
The LRO has supported the National Retiree Legislative Network’s effort to gain passage of the pending pension reform legislation that will hopefully strengthen the protection of pension plans.
With regard to health care benefits Lucent—going into the merger—continues to take the same position as it has for the past few years; that is, the company is concerned about the rising costs for health care coverage for retirees. Lucent has repeatedly stated it will continue managing the costs of health care for eligible retirees, while balancing the needs of retirees with funding levels that would enable the company to remain a viable competitor.
The attorneys we have consulted continue to tell us that health care insurance, the prescription drug plan and life insurance are considered “welfare benefits” in legal terms. Lucent has a “reservation of rights” clause in these plans. By this, Lucent maintains it has reserved the right to change or eliminate these benefits at any time. The LRO will continue to search out and catalogue evidence of Lucent’s contractual undertakings to preserve these benefits. We hope that Lucent and Alcatel will do what is right and continue to provide the health care, prescription drug and life insurance plans that were earned by retirees through their years of service.
The merger and acquisitions attorney addressed the LRO’s questions about the Lucent and Alcatel merger. It is the expert opinion of this attorney that it appears the companies are following all of the American and French governments’ requirements to move forward with the merger that is in reality an Alcatel acquisition of Lucent. He could not identify anything about the merger at this time that should cause the LRO undue concern. Frank Minter, a Lucent retiree who is a former accounting and finance vice president, has been of great volunteer service to the LRO by applying his expertise in the review of the financials stated in the Form F-4 that Lucent and Alcatel have filed with the Securities and Exchange Commission as part of the merger process. Frank reported to the LRO executive committee that he did not find anything in the financial data in the filing that should cause any concerns for retirees.
LRO leaders empathize with our members who have expressed their concerns over what the merger might mean to the future of retirees’ pensions and benefits. Lucent’s acquisition by a foreign company is totally new to our experience so we can’t help but be apprehensive. The climate in the global telecommunications market has made it inevitable that consolidation among equipment suppliers is going to take place. The LRO is doing all that is within its power to do by gaining advice from experts in pension and benefits and mergers and acquisitions law. We will continue to be vigilant toward Lucent’s and Alcatel’s plans and actions. We will also continue to do our part to try to keep communication channels open with Lucent with the hope that a dialogue will be beneficial to retirees as well as Lucent. We should all want Lucent to be successful in its new venture. And we continue to insist that Lucent do the right things for its retirees.
Ken Raschke, LRO President