December 2004


LRO Sets The Record Straight On Lucent’s “Facts” Mailing


All 50,000 management retirees received a mailing from Lucent in November 2004 (click here). There were two enclosures; (1) a letter from Lucent Chairman & CEO Patricia Russo and (2) a 6-page "Facts About Lucent Retiree Healthcare and Pension Plans."  The letter from Ms. Russo was clearly thoughtful. She described her effort to listen to retirees and expressed concern over the financial difficulties of retirees.  There even was a small sense of hope for the future.  But the "Facts" sheet was a very different document.

The LRO wants Lucent to communicate important information to its retirees.  However, to the LRO the “Facts” sheet reads as a calculated effort to discredit and neutralize the LRO’s efforts to protect retirees’ pensions and prevent the further erosion of health care benefits.  After careful consideration of both documents, the LRO Officers have concluded the mailing was filled with generalities that did not provide concrete evidence to support Lucent’s contentions that:

  • the pension plan is secure,
  • health care costs are prohibitive,
  • executives’ compensation is justified, and
  • the mission of the LRO is contrary to the interests of retirees.


LRO Remains Deeply Concerned About Pension Fund Security

             Lucent believes, “The numbers are what they are.” What retirees worry about is how they got that way, and whether their pension checks will be there for them in the future. Here are the facts, from public records and acknowledged experts, many of which have been sent to Lucent and have gone unanswered.

Big losses in the pension funds led to benefit cutbacks:

--In 2001, the pension funds reported a loss in plan assets of $6.8 billion, over 19% of the plan value. In the same period, for example, Verizon’s pension fund reported losses of 6%.

--In 2002, the pension funds lost another $2.5 billion. The LRO believes that this one-two punch led to the Lucent Board’s decision in December 2002 to cancel the death benefit effective February 1, 2003. And the first of the sharp cutbacks in health care was announced in September 2003.

--Lucent claimed that its pension fund has out-performed its benchmarks.  What Lucent didn’t say is that those benchmarks were established by Lucent and definitely were not “best-in-class” benchmarks.

     A troubling record of the fiduciaries of the pension fund:

--In June 2003, a lead fiduciary of the pension fund, the Chairman of the Audit and Finance Committee, agreed to be disbarred from that position to settle charges of fraud and auditor manipulation at another company. There is no record that the other lead fiduciaries took steps to insure that he had no adverse impact on pension decisions.

--In May 2004, Lucent announced that its fiduciary insurance company settled claims that Lucent, itself, made for fiduciary misconduct by Lucent employees in the settlement of a suit claiming ERISA violations. Since the names of those that Lucent identified have not been made public, retirees have no way of knowing whether these fiduciaries had or still have a role in managing pension assets.

     Unanswered questions on fund and trust transactions

--In April 2003, following losses in the Lucent pension funds because of investments in “Private Equity Ventures,” the LRO asked for assurances that these were impartial.  Lucent chose not to certify that these investments met the “prohibited transaction” requirements of ERISA.

     Outside experts continue to raise troubling questions

--In mid 2003, The American Institute of Certified Public Accountants copyrighted a training course entitled “Lucent Technologies: A Study in Fraud and Earnings Management.”  The course had “Aggressive Pension Accounting” as one of its topics.

--In May 2004, a noted investment firm issued its annual 184-page pension update. Of the 500 companies in the S&P 500, Lucent was ranked #1 in pension “false income” and ranked #4 in pension “false assets.”

     LRO believes ERISA needs stronger standards

The LRO believes if Lucent was truly concerned about its retirees it would be more forthcoming in providing information instead of just saying that the pension fund is secure because its funding is based on the Employee Retirement Income Security Act of 1974 (ERISA) .  There is a growing realization by many retiree organizations and lawmakers that mere conformance to ERISA does not guarantee the sustainability of a pension plan.

The New York Times reported in a November 6, 2004 article that “Nearly every company that has defaulted on its pension made the contributions the [ERISA] law required, even as the trust funds sickened and died.” 

     PWC audits have potential for conflict of interest

Lucent wants retirees to be placated by its assurance that the pension trusts are audited by PricewaterhouseCoopers (PwC) against Generally Accepted Accounting Principles (GAAP).  The LRO does not consider the audits by PwC to be adequate because ERISA standards are inadequate to ensure the soundness of a pension plan.  In addition, the LRO believes that PwC’s audits of both the Lucent corporate books and the pension and benefit trusts presents the potential for a conflict of interest.  And we’ve said so to both Lucent and PwC.

            Remember too that the Securities and Exchange Commission (SEC) charged Lucent with GAAP violations due to “fraudulent and reckless actions.”  Lucent agreed to pay a $25 million penalty to the SEC to settle the case without admitting or denying the allegations.

     LRO believes “trust but verify” 

If retirees are to trust Lucent, shouldn’t we be provided the opportunity to verify its data?  The facts are that the pension fund losses, the actions of the fiduciaries, key unanswered questions and expert outside opinions are deeply troubling and unaddressed in Lucent’s “fact sheet” mailing.  The sole authority for deciding on whether to have a comprehensive second, outside audit, and its scope, are the Independent Directors on the Audit Committee, not Lucent executives. The LRO will take every possible step to petition the Independent Directors and to persuade them that the facts require them to take action to protect the interests of retirees (and shareholders).

In addition, the LRO will redouble its efforts, which Lucent has successfully blocked to date, to have truly independent, “best-in-class” fiduciaries appointed to oversee the assets held in trust for pension-vested employees and for retirees.


LRO Considers Lucent’s Cost of Healthcare Statements Misleading

            Lucent repeatedly stated in its “Facts” mailing that the company cannot afford to spend nearly $800 million a year for retiree healthcare.  Since the mailing was only sent to management retirees, what Lucent did not make clear is that it expects the funding requirements for management retirees’ healthcare in fiscal 2005 will be approximately $200 million.  This figure was stated in a December 3, 2004 filing with the SEC.  In the SEC document—filed only a week after its mailing—Lucent stated, “Although it is difficult to estimate these expected future payments, our current view is that the annual funding requirement will remain at approximately $200 million for management retirees for fiscal 2006.”

            Lucent went on to state in the filing: “With respect to represented retirees, we do not expect to have to make cash payments until fiscal 2006 because assets are currently held in a separate trust to fund these payments. Our tentative labor agreement with the CWA and IBEW caps the amount the Company will pay for retiree health care for formerly represented retirees that retired on or after March 1, 1990. This tentative agreement also requires us to fund $400 million to a new trust by September 30, 2012. The exact amounts and timing of annual contributions will be determined by the Company, but the minimum amount of each annual contribution, beginning in 2005, is $25 million.

     Lucent really is spending $200 million of its cash, not $800 million

When given all the facts, we recognize that Lucent is spending about $200 million of its own cash for healthcare for management retirees. Moreover, this is not voluntary – it is mandated by statute because of the large losses in the pension funds. The healthcare expenses of represented retirees are currently funded from a trust fund transferred from AT&T to Lucent when it was spun off in 1996.  The healthcare trust fund for management retirees transferred from AT&T to Lucent was depleted in 2003 by a $600 million loan that Lucent has stated would be “complex” to fully explain.

            It should be noted that Lucent has never contributed any of its own cash to the healthcare trust funds for management or represented retirees even when it could have afforded to do so during the boom days of the business when Lucent made large profits.

     Why does Lucent publicize $800 million for health care costs?   

            Since Lucent has constantly publicized the $800 million as its cost for retiree healthcare, we have to question whether Lucent’s intentions are directed toward misleading retirees, the public and government officials.  We have asked Lucent to stop using the misleading $800 million figure.  That request has been ignored.

     Did Lucent co-mingle management & represented trust funds? 

            The LRO believes that Lucent co-mingled the auditing of the funds provided by AT&T for both represented and management employees and has asked to meet with the auditors.  Lucent has declined this request.  In May 2004, after analysis by an LRO consultant, the LRO asked for the details of a $600 million loan in the management health care trust that depleted the assets and that were not explained by the independent auditor. Lucent executives declined to provide an explanation or permit a meeting with the auditor. 

            We have asked Lucent to clarify and explain why management funds ran out while funds for represented employees will continue to support their healthcare for two more years.  Lucent has not answered this question. 


Lucent Defends Executives’ Compensation 

            Although the LRO believes that Lucent’s executives contributed heavily to the company’s problems, we are pleased that beginning in the fourth fiscal quarter of 2003, Lucent has posted at least a modest profit for five consecutive quarters.  We know from reading analysts reports that Lucent has close to $5 billion in cash and has a positive cash flow of $100 million per quarter.  Certainly, Lucent’s executives have made some significant improvements in operations.  But do those improvements merit record high compensation when retirees are seeing the erosion of their economic livelihood due to Lucent’s cuts in benefits?  And the executives will not even consider restoring at least some of the benefits as Lucent’s profitability grows.

     Forbes’ ranking of Lucent CEO’s pay

            Forbes reports that Lucent’s revenues rank 695 out of 2000 companies while on the basis of profitability it ranks at 1816.  However, the pay for Lucent’s CEO is ranked at 190.  Compare this to Cisco’s CEO whose pay is ranked at 494 while Cisco’s revenues are ranked at 89.

            As Lucent likes to say—“The numbers are what they are.”


LRO Committed To Success Of Retirees And Lucent

            The Lucent “fact sheet” disparages the LRO’s mission statement that states our intent to “preserve and urge the enhancement of pension, healthcare and other benefits…”  Lucent chose to omit the very next mission statement, “Strengthen Lucent.  To the extent consistent with Retirees’ interests, help strengthen Lucent to the best of its ability.” There isn’t a single “fact” presented to support Lucent’s contention that the LRO is acting contrary to the interests of retirees.  Is Lucent attempting to neutralize the LRO’s credibility with its members and prospective members by being so selective in its reference to our mission?

            Lucent would have retirees believe that the company has been responsive to the LRO’s questions and there have been regular meetings with the LRO.  Many of the responses to the LRO’s questions have been incomplete or evasive.  The last meeting with a Lucent official was on November 3, 2003.  On May 10, 2004, the LRO requested a face-to-face meeting with Lucent executives and proposed agenda items on pension and healthcare trust issues.  Lucent turned down the request, instead providing inadequate written responses to the proposed agenda items.  Again on September 26 and October 13, 2004, the LRO requested in emails to Lucent that a meeting be held to discuss issues important to retirees.  Lucent did not respond to the request for a meeting.

     LRO will continue efforts to have meeting with Lucent

            The LRO will continue its efforts to gain an audience with Lucent officials consistent with its belief that a conference table is where the important issues of pensions and benefits should be discussed.  Lucent's unilateral mailing without discussion simply utilizes the company's advantages of staffing and financial resources to seek to sway management retirees to their viewpoint.

     Lucent controls mailing list to retirees  

The mailing was done by Lucent with full awareness that it controls the list with retiree’s names and addresses. Therefore, we ask our members to share the LRO’s response to the mailing with their former co-workers who do not receive LRO emails or access the LRO website ( .  When you share this information with them, please encourage them to become an LRO member and to send a check for $25 dollars to the LRO for annual dues to help in our collective efforts on behalf of retirees.

     Retirees making their views known  

A number of retirees have written or sent emails to Patricia Russo (  to give their views on the Lucent mailing.  We hope many retirees will share their opinions with Lucent on the issues contained in the company’s mailing and the LRO’s response.  Any retiree who writes a letter to Lucent and would like a copy of his/her letter posted on the LRO website should send a copy to .       

     Retirees need strong voice to advocate their rights

With the attack on the LRO by Lucent, it is clear retirees need a strong voice to advocate their rights.  It is through your dedication and financial support that we’ll be able to accomplish our mission to preserve and urge the enhancement of pension, healthcare and other benefits earned by retirees.  And, to the extent consistent with retirees’ interests, we will help strengthen Lucent to the best of our ability.