Retiree Benefit Questions

1. What benefit changes will active management employees experience in 2004? Will they also be affected by the cancellation of dental benefits and ending insurance subsidies for dependents if base salaries are at least $87,000?
We have already made a number of benefit changes for active management employees. They already pay the same co-pays as retirees and will be affected by the same plan design changes that affect retirees, including changes that impact emergency room co-pays and deductibles and the drug plan. Active management employees already elect and pay for dental benefits separately. However, we are not eliminating subsidies for active management employees’ dependents because we need to keep our benefits competitive with those offered by other employers.

2. Are retired executive managers like Mr. McGinn and Mr. Schacht also affected by these 2004 retiree benefit changes or are they covered by a different benefit agreement with Lucent? If different, please provide the benefit coverage given to both retired CEOs.
Yes. All of our management retirees have the same healthcare benefits, regardless of their level. Our senior leaders are no exception.

3. What benefit changes (if any) have retired officers received in the benefits provided by LU for 2004?
Both active management employees and management retirees can expect to share the costs of our healthcare coverage, and our senior leaders are no exception. In fact, the company will make no exceptions to the changes we announced.

4. "Why was $87,000 in salary the basis for dependent subsidy? All pensions are fixed rates. Why not increase the subsidy in increments by steps. For example, salary of $10K to $30K - 40% increase, salary of $30K to $60K - 80% increase, salary of $60K to $100K - 120% increase, salary of $100K to $150K - 160% increase and $150k and higher 200%. We retirees are in this together. You don't have to treat us equally but equitably. An $87,000 salary cap is not equal or equitable.
Section 420 rules – government regulations that cover the transfer of funds from pension plans – allow a company to eliminate coverage only for 10 percent of the covered participants in a given year, and specify that the reduction must be targeted to a particular group. Although we lobbied in Washington for the flexibility to spread the reduction across all management retirees and their covered dependents, we have not yet been successful. As a result, we chose to eliminate the subsidy for dependent coverage and – to minimize the impact to who retired at lower salaries – chose to do so by applying an income qualification.

5. Why is the $87,000 base salary cap costing retirees to pay for their dependents? This is unfair to these retirees for the following reasons:
· Retirees NO LONGER make this money, it might be understandable for the active employees.
· Retirees that made less than the $87000 cap in base salary aren't penalized, yet some of these retirees made 3,4 or 5 times their base salary because of bonuses and/or commissions. The pension calculations are based on total annual salary so these retirees get the benefit of a higher pension.
· People were forced to retire to help the company get through a tough financial time, yet the execs keep getting more money and perks. Let the execs take a salary cut to save on expenses, quit looking for people on fixed incomes to contribute. What ever happened to "PAY FOR PERFORMANCE"?
Question was not answered.

6. Is it possible to get Lucent to reconsider eliminating all dependent coverage after the $87,000 limit and at least support within the medical cap 2-person coverage beyond the $87,000 limit - meaning retiree and spouse?
These are difficult decisions that we have thought long and hard about. We intend to continue to provide access to and a level of subsidy for healthcare coverage for our retirees, but to have a viable business, we have to maintain competitive levels of investment in research and development, marketing, information technology and in our current employees.

7. Why remove the spouse insurance for anyone? That is a very serious step in the money distribution of a household.
Section 420 rules – government regulations that cover the transfer of funds from pension plans – allow a company to eliminate coverage only for 10 percent of the covered participants in a given year, and specify that the reduction must be targeted to a particular group. Although we lobbied in Washington for the flexibility to spread the reduction across all management retirees and their covered dependents, we have not yet been successful. As a result, we chose to eliminate the subsidy for dependent coverage and – to minimize the impact to who retired at lower salaries – chose to do so by applying an income qualification.

8. How do/can you justify a 300% increase in Medical costs in one year?
The rising cost of retiree healthcare is a national issue and our entire industry has faced a significant downturn. As the number of retirees has grown 22%, our retiree healthcare costs have increased 85% -- from $460 million in 1997 to an estimated $850 million in 2003. That’s about 10% of our annual revenues and almost half our annual payroll.

9. Would Lucent consider reducing the Medical costs to retirees by cashing in the unexpired Lucent stock options at their issued price? These stock options were issued to employees in good faith for their performance and loyalty to Lucent. Couldn't Lucent now show their good faith and loyalty to their retirees?
The IRS has strict rules on the use of stock options and when and why they can be cashed. But, even if it didn’t, the issue with retiree heath care is affordability and cashing the stock options would not address that issue for the company.

10. Isn't there an implied promise to provide the benefits that we were told we were going to get upon our retirement? When I was hired at Western Electric/AT&T/Lucent, I was under the impression that my excellent retirement benefits were part of my total reimbursement package. I was always told that my benefits were included in my total reimbursement package and that the price of those benefits were factored as part of my salary. A lot of people made the decision to stay with Western Electric/AT&T/Lucent because they thought they were working for those excellent retirement benefits we thought we would get one day. Does this make sense? I don't exactly know how to word it, but I, for one, stayed with the company because I thought part of what I was working for was good retirement benefits.
These are very difficult decisions that were not made lightly or before we had explored every other option. Lucent inherited a number of retirees and their related obligations as part of our spinoff from AT&T. Under federal law, obligations relating to retiree healthcare benefits are not generally protected or guaranteed the way your pensions are. In fact, only 12% of companies in America even offer retiree healthcare benefits today.
The company has stated very clearly in our communications over the years that we “reserve the right to change future retiree healthcare coverage and life insurance benefits” and we have found ourselves in a situation where we must take action.
The numbers simply do not work. Lucent, its market and the general economy have changed dramatically over the past few years, and this was a tough decision, but one we could not avoid.

11. Not at risk, I chose to take the 5+5 given the "information presented to me" that LU may not in the future offer health care benefits to those leaving the company through retirement. I recall the notation that LU could change its position on that at any time without notice. Was this the plan from day one?
No. That was not the plan from Day one. The soaring costs of healthcare in recent years coupled with the sharp decline in the equity market since 2001 forced the issue.

The company has stated very clearly in our communications over the years that the company "reserves the right to change future retiree health care coverage and life insurance benefits" and we have found ourselves in a situation where we must take actions.

The numbers simply do not work. Lucent, its market and the general economy have changed dramatically over the past few years, and this was a tough decision, but one we could not avoid.

At the rate healthcare costs are increasing, we are facing close to $1 billion in annual retiree healthcare costs unless we take action now. Unfortunately, a company of our size and revenue cannot afford to absorb these costs and remain a sustainable, competitive enterprise.

12. When things get better in the telecommunications industry and the economy generally, will Lucent consider reinstating any of the cancelled benefits?
No. It’s unlikely that the company will be able to generate enough cash to handle $1 billion of healthcare costs in the foreseeable future.

We do intend to continue providing access to and a level of subsidy for healthcare coverage for our retirees, but to have a viable business, we have to maintain competitive levels of investment in research and development, marketing, information technology and in our current employees. These continuing investments are critical to our ability to have a successful company that can continue to provide retiree healthcare, even at reduced levels.

Access is a big deal. We will give every retiree and their dependent access to a generous and comprehensive health plan at reasonable costs. We will let you opt in and out as often as you want without a physical and without penalty. Ask your friends or ask the retirees of the 90% of the companies that don’t provide healthcare how much a similar policy would cost -- if you can get it. On average, our group rates are at less than half the cost of comparable coverage, and in many cases our rates are even better than that.

13. Do retirees have to bring a class action lawsuit against Lucent to retain our benefits? Do retirees have to start writing Senators on all issues regarding Lucent so that we do not lose everything? I worked for Western Electric, AT&T and Lucent for 38 years, which is a lifetime of devotion and hard work. We worked hard for our benefits and now we are to lose some of them. I'm still mad about the death benefits they took from us. Lucent has been reducing my benefits for 5 years and getting away with it. This is the beginning of what additional take backs Lucent will pull off. This is not right! We all worked plus gave to this company and the ones who brought Lucent down are getting $$$$$$$$$$$. We have a 401K destroyed stock worth $2.00 a share. What a joke! And WE HAVE TO TAKE this? Surely something can be done??????
The problem with legal action or broad legislation designed to keep companies form reducing retiree benefits is that companies that have a large retiree base may be forced out of business -- and that would eliminate access to medical care and any level of subsidy.

Even with these changes, you can’t lose sight of the fact that Lucent still provides better benefits to its retirees than about 90% of U.S. companies.

We continue to provide:
Ø A choice of plans, ranging from traditional indemnity and a Point of Service plan to a number of HMOs and even a pharmaceutical-only plan
Ø Plans that cover in-network and out-of-network doctor visits, hospitalization, ER visits, physical therapy, rehabilitation and drugs.
Ø The ability to opt in and opt out of Lucent coverage going forward so that retirees will have a safety net for access to medical coverage when needed
Ø Continued access to Lucent's group dental plan at very competitively priced group rates.
We also provide company paid retiree life insurance as well. Even with the changes we’re making to some subsidies in 2004, Lucent is still paying the majority of the total cost of healthcare coverage for our retirees and employees.

14. When I signed up to pay for Other Covered Charges (OCC) it was a lifetime agreement that assured lifetime protection for me. Was making it free a trick to illegally set up OCC for later cancellation? I am currently enrolled in POS. How will this apply to POS? The information I received stated that Effective January 1, 2004 you would not be charged for any additional OCC you have elected. Traditional Indemnity will continue to provide benefits payable at 80 percent for OCC services, but there will be an unlimited lifetime maximum on the amount that will be paid. I currently do not have the option of signing up for Traditional Indemnity. I am pleased that Lucent has decided to waive the premium.
No, it is not a trick. You’ve interpreted the POS information correctly.

15. Is the new Catastrophic POS eventually going to be the medical benefits for retirees? Since this is been introduced and the way Lucent has reduced the benefits in the past years it makes a person concerned.
That is not the current plan. We need to assess the rising costs of healthcare with the ability of the company to pay.

16. Why is Lucent for the POS option changing the coinsurance for hospitalization outpatient services and other covered services from 100 percent in-network and 80 percent out-of-network to 90 percent in-network and 70 percent out-of-network? Why does Lucent offer other choices for percentages such as 100/80, 80/60, 70/50? This should only affect a retiree's cost for the insurance.
These increases reflect our ongoing costs of providing healthcare coverage.

17. Why is Lucent raising the co-pay, out-of pocket maximum, emergency room visits, etc. This should only effect a retiree's cost for the insurance.
The increase in co-pays, out-of-pocket maximum, and emergency room visits are part of our overall effort to reduce the cost of providing healthcare. Both active employees and retirees are subject to these changes.

Lucent Pension Fund Questions

18. Who manages the Lucent Retirees Pension and Benefits Trust Funds? Why haven't we received a statement on each fund in over two years?
In April 1999, Lucent established Lucent Asset Management Corporation (LAMCO). LAMCO has engaged investment managers with full investment discretion, within specific objectives and guidelines, to invest and reinvest the assets of the Plans and Trust. All investment managers are external third-party investment managers. Lucent’s Annual Report tracks the progress of the pension assets each year.

19. Why hasn't Lucent's senior leadership modified the current Force Management Plan (FMP) to adopt Post Employment Payments (PEP) from current cash flows instead of Supplemental Pension Benefits (SPB) from our underfunded pension fund? Lucent used about $800 million in pension assets to pay termination benefits as it cut 54,000 employees from its payroll in 2001 and 2002. Lucent withdrew $1.2 billion from its pension plan to pay for retirees' medical expenses between 1999 and the end of 2002. [Source: WSJ 7/10/03]
Our pension plans still meet the requirements of ERISA’s minimum funding rules.

We used the assets of the healthcare trusts to pay retiree healthcare costs and, until now, we were able to fund our costs from transfers from pension plans, which were over-funded. These transfers were permitted by law as long as our pension plans were funded at 125 percent or more, and allowed us to use part of our excess pension assets to provide retiree medical coverage and termination benefits for our restructuring plan. However, the drop in equity markets has reduced plan assets, and lower interest rates on bonds have increased plan liabilities. Therefore, these transfers are no longer possible. For your information, the $800 million of transfers would not have made a difference in our ability to be 125 % over funded. The bulk of the reason for the decline in pension assets was the drop in the equity markets.

This is not an issue specific to Lucent. The declining equity markets have affected most pension plans throughout the corporate world in 2002.

20. Why does the government continue to allow Lucent to withdraw from the pension fund, especially with the interest rates being low? Naturally the pension fund is depleting more rapidly than gaining. Shouldn't this be stopped until sometime in the future when interest rates go up and the economy becomes healthy? (I don't know the government criteria for withdrawal from pension funds).
Lucent may only withdraw from the pension if it is funded at 125% or more. Since the management pension is no longer funded at 125%, we are no longer transferring funds. We also are no longer transferring funds from the pension fund for represented employees.

21. What is Lucent's current and planned position on pensions for current retirees?
Your monthly pension benefit is a protected benefit under ERISA and the Internal Revenue Code, and cannot be cut by the Company.
Our pension plans still meet the requirements of ERISA’s minimum funding rules and these qualified pension plans (management and occupational) are funded through separate trusts. The Pension Benefit Guarantee Corporation (PBGC) also protects portions of the accrued pension benefit payable from the pension fund.
We report on the status of the pension plans at the end of each fiscal year. As of Sept. 30, 2002, the market value of the management pension plan assets was $14.5 billion and the accumulated benefit obligation on an accounting basis (GAAP) was $17.3 billion. The difference of $2.8 billion represents the under-funded status under GAAP.
Under ERISA, the management pension plan is about evenly funded, and we do not anticipate making any contributions to the plan in fiscal 2004.

22. Will LU allow independent auditors to audit all pension trust funds? If so, where are their results?
PriceWaterhouseCoopers serves as Lucent’s General Auditor and outside auditor of the pension funds.

Lucent Management Questions

23. Why do the top executives continue to get a "retention bonus" when they do not improve the company sales or bottom line? That is very extravagant. Their salaries of millions are enough.
When Henry Schacht returned to Lucent three years ago, he offered a limited number of officers retention payments if they stayed for two years to help turn the business around. This was designed to reduce their personal risk if a new CEO determined that he or she needed an entirely new team. At that point, there were sectors of the market that were doing well and these leaders all had the potential to go to more secure employment if they chose to do so. It was a decision that was made almost three years ago, and the final portions of those commitments were paid out last year. And it kept the leadership team in place who developed and executed the plan that kept the company in business during the deepest and most prolonged market slump in the industry’s history. During that time, the company reduced the cost structure by 75%; doubled the gross margin rate; reduced vendor financing commitments by 91%; reduced cash burn from $1.3 billion in the first quarter of fiscal 2001 to less than $100 million in our last quarter; and, perhaps most importantly, enabled the company to post the highest customer satisfaction results in years. There have been no annual performance bonuses for Lucent’s officers since 1999.

24. How can upper management justify their sign on bonuses and current salaries in light of Lucent's performance, stock price, layoffs, and reduction in retiree benefits. And saying they had to in order to retain good people is ludicrous with the current job market?
The fundamental reason is that we need to pay competitively to attract the right leaders and talent at all levels of the company to keep the business moving forward. We haven't asked employees at any level to take pay cuts because it is a short-term solution.

And second, even if we eliminated the salaries for every officer in the company today, it would only address about 1% of the retiree healthcare cost issue. The fact is, the money Lucent spends on executive compensation has already been reduced significantly in recent years. At our peak, we had 86 officers, and today we have 32. There have been no annual performance bonuses for Lucent’s officers since 1999. In addition to no bonuses and given the fact that approximately 60% of executive compensation is at risk in options and long term incentives, the average Lucent officer makes about 20% to 30% of what he or she did four years ago.

25. What consulting duties does Mr. Schacht perform as chairman of Lucent's Pension and Benefits Task Force?
Henry Schacht’s consulting fee was paid to help resolve five issues for Lucent: the shareholder suits, the SEC investigation, retiree health issues and some matters relating to the capital markets. With the shareholder suit and the SEC investigation basically behind us, we cut his fee in June and it ended September 30. The Board determined that he had a unique ability to deal with these issues and having him on the payroll to represent the company on these legacy issues would allow Pat Russo to focus on running the operations of the company and planning a strategy for its future.

26. Does Lucent's Pension and Benefits Task Force recognize and negotiate retiree benefits and issues with the Lucent Retirees Organization's (LRO)?
No. Lucent currently retains employees, and engages professionals, who have expertise in the healthcare service delivery market, to evaluate the cost-effectiveness of our active and retiree healthcare benefit plans.

27. Why wasn't the Lucent Retirees Organization's (LRO) executive management notified about planned 2004 retiree benefit changes prior to the filing of the 8K Report with the SEC on Monday, 9/8/03?
The LRO met with management twice and were clearly told that due to soaring healthcare costs and an unprecedented decline in the market—both telecom and equity—that the numbers did not work and that there would be have to be reductions in retiree benefits. The company determined that they wanted to communicate the details directly to its retirees and not on the LRO website, so it mailed the benefits information to retirees on Friday; posted the notice to the SEC on Monday, September 8 at 3:30 PM and gave the LRO president Ken Raschke a heads up earlier in the day.

28. Did the Board of Directors of Lucent Technologies Inc. approve our current retiree benefit changes and how did each Board Member vote? The Board (or its delegate) reserves the right to modify, suspend, change or terminate benefit plans at any time (Source: Your Benefits Resources(tm) Web site 11/12/2002 http://www.lucent.com/openenrollment),
Yes. The board of directors approved the benefit changes.

29. Why does Lucent have money to build a $50M building in China, especially when it has 4 new buildings in the Lisle-Naperville area practically empty, but there is no money to pay my dental insurance?
Lucent is spending $50 million on R&D in China. Doing R&D in- country is a key element of getting business in China.

30. What actions, if any, has Lucent taken against Rich McGinn? What was his departure package?
Mr. McGinn was removed from his job in October 2000 when the Board determined that he wasn’t the right man to lead the company through the kind of turnaround that the changing and declining market required. He received basically the same severance package that is offered to all Lucent officers. Some of the other elements of his package were the results of being with ATT and Lucent for over 30 years.

31. Why is Henry Schacht here (true purpose) and for what benefit to the audience.........advocate or conduit/messenger? What does Henry expect to get from these meetings? Are we wasting our time raising concerns to him based upon his role (my assumption is that he is to gracefully screw us in favor of the company)?
Question was not answered.

32. What happened to pay for performance at the executive levels.....I see no one being salary treated based upon Lucent's performance? Are there any "captains" among the executives who share the pain with employees/retirees by reducing their compensation (including benefits) in these hard times?
Our officers and retired officers have been affected by our healthcare changes in the same way as other management employees and retirees.

All of our management retirees have the same healthcare benefits regardless of their level. Both active management employees and retirees can expect to share the costs of our healthcare coverage, and our senior leaders are no exception.
There have been no annual performance bonuses for Lucent’s officers since 1999. In addition to no bonuses and given the fact that approximately 60% of executive compensation is at risk in options and long term incentives, the average Lucent officer makes about 20% to 30% of what he or she did four years ago.

33. Are the salaries of Lucent Senior Executives tied to performance? My salary was. I feel like Western Electric/AT&T/Lucent was built on the backs of hardworking, dedicated employees like us. We are the people who worked so hard to make Western Electric/AT&T/Lucent successful and now, for the company to treat us like this, is terrible. One thing Schacht said that I agree with is that this is no longer the excellent company I once worked for. Lucent has been taken over by greedy opportunists who are just out to get all they can for themselves. They should take the benefits and pensions away from the people who ran this company into the ground and leave the rest of us alone.
Executives are only guaranteed their salaries—their bonus is performance based—and no Lucent officer has received a performance bonus since 1999. And approximately 60% of executive compensation is at risk in options and long-term incentives that have been essentially worthless in the same time period. The average Lucent office makes about 70 to 75% of what they made in 1999.

34. Why not cut salaries for active employees 25-50%, starting with those making over $200,000? Use the already skilled workers to produce product, by still cutting costs. You'd retain a work force in the USA, support the US economy and while cutting costs, demonstrating a commitment to employees. I know they'd rather be working than afraid. Apply these savings to retiree benefits. I can't recall any fine print stating they could take them away when I committed to the retirement plan.
In effect, we have cut executive pay at or more than that level. But we still we need to pay competitively to attract the right talent at all levels of the company to keep the business moving forward. We haven't asked employees at any level to take pay cuts because it is a short-term solution.

35. Why not pay Board members only with stock options? Those committed to growth would show their worth, those not committed are not needed and could be replaced easily. This would reduce costs to LU and would demonstrate their commitment to the company, and the stock market would reward it with a high value, increasing the dollars LU would have, and could be used to provide the benefits to the life long committed retirees.
Question was not answered.

36. Are any members of the Lucent Board of Directors, that approved the purchase of a (Lucent owned?) golf course, still active on the Lucent BOD? If yes, why?
The Golf Course project was not submitted to the Board for approval. The original plan called for a hotel/learning center with golf course that was to be owned jointly by 18 corporations. The intent was for Lucent to be a member and use it only for customer meetings/entertainment like other companies like NCR and IBM have done in the past. When Henry Schacht returned to Lucent, he determined that it was not the best use of Lucent resources and Lucent management attention and the golf course was sold.

37. Doesn't Lucent's executive management and board of directors have a fiduciary responsibility to provide retirees with affordable healthcare and life insurance coverage based on the coverage they received at the time of retirement? This does mean rates cannot go up because of additional expenses. On 7/12/2001, Mr. Schacht told an audience [of Lucent Employees] that more than 8,500 people had taken the voluntary retirement offer. "These are outstanding people who made wonderful contributions to the company," he said. "I want to thank them for their dedication and commitment."
The company has stated very clearly in our communications over the years that the company "reserves the right to change future retiree health care coverage and life insurance benefits" and we have found ourselves in a situation where we must take actions.

38. What is Lucent’s plan to return to profitability besides eroding away retirees and active employee benefits?
Lucent intends to be the industry’s leading network integrator. It intends to increase revenues through a multi-tiered program of increasing our presence in new markets like services, government, selling through partners and new geographies in addition to improving our presence in our key service provider customers by helping them build on their current network investment with next generation voice over IP solution; metropolitan optical solutions; advanced mobility solutions that provide high speed data, access products and operations software to help integrate and manage complex networks.

39. Is any LU executive compensation linked to the performance of any pension trust fund? If so, who and how is their compensation affected?
Clearly, there is a Lucent pension investment manager whose salary is impacted by the performance of the Pension fund. Other than that, a pension credit is included as part of the original target for the business plan that governs compensation. If the Pension reaches the target, it has a neutral impact, if it misses its target, it decreases compensation and if it exceeds it, it has a slight upward impact on overall compensation. In general, it has been a neutral impact. And FYI, there have been no performance related bonuses for officers since 1999.