To LRO Members:
In early February, Pat Russo sent a letter addressed to Lucent
retirees with information about pension and healthcare benefits. She also responded to a number of questions from retirees on this issue at the Lucent Annual Meeting earlier this month. The LRO appreciates the effort Pat expended in reaching out to communicate. But as the attached “open letter” to Pat Russo states, we believe there are issues that need to be presented more clearly to retirees so they understand the total picture associated with their pension, healthcare and life insurance benefits. .
Based on the questions from retirees that the LRO has received, when all the facts are put together, retirees’ pensions, healthcare and life insurance benefits are a source of considerable concern--as is the governance process that got us to the current state.
Here are four examples of what's missing from Lucent’s communications with retirees:
This means that the
management pension plan has been IN THE RED for 3 years.
And when an LRO
member who is a Lucent shareholder asked Pat Russo about this at Lucent’s
Annual Meeting on February 15, 2006, her answer was that telling retirees
these facts would "create unnecessary worry."
Pat's letter or the Annual Meeting would have been a great place to explain the meaning of Mr. D’Amelio message, well before the September 2006 arrives. We hope the message will not be the all-too-familiar - very difficult decision; a decision not made lightly.
4) Tell retirees that
their life insurance benefit is secure.
With your ongoing support the LRO will continue to invest our volunteers’ time and expertise and our financial resources to delve into every Lucent filing, gain access to every government document and read every news report that sheds light on Lucent’s actions. We will also continue to work with the National Retiree Legislative Network to enact federal legislation that will better protect our pension and benefits and require company’s like Lucent to be completely transparent in dealing with their retirees.
When the facts merit, we will support retirees who take legal action like in the recently filed lawsuit against Lucent to recover healthcare costs wrongly shifted to management retirees and the support the LRO is providing to the lawsuit to restore the Death Benefit.
Now more than ever, the LRO needs your support through your personal involvement and financial resources provided through your annual dues and contributions.
I will advise you of Pat Russo’s response to my attached letter.
Lucent Retirees Organization
K. O. Raschke – 231 Pinetuck Lane – Winston Salem, NC 27104
______________________________________________________________February 24, 2006
An Open Letter to Lucent Chairman & CEO Patricia Russo from the LRO:
During the month of February, you have had two opportunities to communicate with Lucent retirees. The first was your letter to retirees and the other was through the Lucent Annual Meeting and its webcast. The LRO has received questions from Lucent retirees asking why in these communications there was a reluctance to share with them the potential future risk associated with their pension, healthcare and life insurance benefits. We know that the anxiety and unrest that we hear from retirees is not what you intended to be the result of your communications. We are unable to answer many of the questions related to your communications or to ascertain a motive for them.
Based on the widely reported shortcomings of the ERISA pension accounting rules, retirees have asked why Lucent doesn’t acknowledge its own Financial Accounting Standards Board calculations that show the management pension plan is underfunded by more than $1 billion? They ask whether Lucent is doing anything to remedy this situation? Or is Lucent only following ERISA rules that have resulted in pension plan failures in a number of companies?
A number of retirees have expressed their shock and dismay over your response to a retiree’s question at the Lucent Annual Meeting about future plans for management retirees’ healthcare. You stated that there is not a specific plan for healthcare for management retirees. You went on to say that Lucent is currently funding healthcare out of operating cash and you expect to continue to do that.
Your statement that Lucent expects to continue to pay for healthcare out of operating cash is good news. However, some retirees who follow your 10K filings with the Securities and Exchange Commission have asked why you didn’t acknowledge in your letter to retirees or in response to the question at the Annual Meeting that over the past two years Lucent has reimbursed itself more than $400 million in cash out of the trust fund that was originally established to pay life insurance benefits to retirees’ beneficiaries.
You’ll recall that at the Annual Meeting a retiree asked whether Lucent has any plans to eliminate the life insurance benefit and if not would you assure retirees of that in writing. Your first response was there are “no current plans to eliminate the life insurance benefit” and you would take into consideration whether you’d be willing to put that in a letter. But then you hedged on your statement, saying management has to retain the appropriate level of flexibility [on the life insurance] because of the unknowns.
Retirees ask why the life insurance benefit can’t be held sacred as was intended in the original life insurance trust? They wonder why it isn’t 100% certain their survivors will receive what was promised to them. Many of them have been paying income tax on the life insurance benefit for years or paid the tax in advance when they retired and, based on this, believe that the life insurance is a certainty—no ifs, ands or buts. The LRO has requested from Lucent a statement on the assets and obligations of the life insurance plan and our request has been turned down. It is also unimaginable that Lucent would renege on life insurance given it has already deprived widows of the promised death benefits (currently being litigated).
Pat, your letters to retirees the past two years and the questions asked by retirees at the Annual Meeting the past three years have presented Lucent with ample opportunities to present all the facts. Retirees do not understand why you have not done so. We want to point out several examples in the attachment that we believe require more clarity beyond your recent letter to retirees. (The statements in bold type are from your recent letter to retirees.)
The LRO must be active and persistent in carrying out its responsibility to ensure that retirees are fully informed on the retirement issues that impact their lives and the well being of their dependents. With Lucent not providing a balanced view of the issues, we can only inform retirees and the media about what we think we have learned from the information we have gleamed from various other sources. Improving the current adversarial Lucent/LRO atmosphere could go a long way to ensuring that retirees are provided accurate information. At the same time, retirees could regain some of their respect for their former employer whose manta for many years has been “open and honest” communications.
The LRO is willing to serve as a sounding board to provide retirees’ perspectives on future communications prior to the distribution to retirees. As always, we look forward to your thoughts on this suggestion, or any other way to bridge this divide on full and meaningful disclosure. Where we are now is not serving stakeholders well – retirees, employees and shareholders.
Very truly yours,
On behalf of
The Board of Directors of the
Lucent Retirees Organization
Lucent Board of Directors
“You can find information about Lucent’s pension plans beginning on page F-59 in our most recent 10K filing…”
Recommending that retirees review Lucent’s financial information is helpful to expand their understanding of the status of their pension plan. But referencing the many pages of tables and footnotes at page F-59 makes for difficult reading for most retirees. We need to clarify a statement in an earlier section, where in plain English the 10K stated,
» Our pension and postretirement benefit plans have uncertain funding requirements.
Which then leads to Lucent’s disclosure:
» The estimated accumulated benefit related to the U.S. management pension plan exceeded the fair value of pension assets as of Sept.30 2003,2004,2005. (Page F-7)
Simply put, based on Financial Accounting Standards Board (FASB) calculations,
The management plan has been in deficit for 3 continuous years
And later on, retirees would find out the amount is greater than $1.4 billion or more, for each one of the last 3 years.
An LRO member who is a Lucent shareholder asked you at the recent Lucent shareholders’ meeting about this deficit contained in the 10K report. Your response was
» To go down a path that would create unnecessary concern, worry and uncertainty by using numbers that aren’t related to whether or not the plans are fully funded. I’m not sure what purpose that serves.
Those “numbers” serve a very essential purpose, according to the Financial Accounting Standards Board:
» …evaluating the employer’s obligations under pension plans and the effects of those obligations on the employer’s future cash flows and estimating the potential impact of net pension cost on future net income is essential.
Indeed, in your answer you made no mention of the future uncertainties surrounding the management pension plan. The LRO’s expert advisors tell us that is specifically the reason why FASB requires disclosing the data in Lucent’s 10K. ERISA has no such provision about future impact on the corporation. Retirees need to understand there are two sides to the pension calculation equation—ERISA and FASB.
“If you just look at the rate of return over the past year…the performance of our overall pension assets was well over the assumed return rate…”
It’s good news that the pension plan performed well last year. But using your measure of pension plan performance (the difference between the assumed and actual rate of return) Lucent lost
$12.9 billion in the prior four years.
Your letter’s comments about 10-year performance raises questions because retirees know that for five or more of those years, the plan was managed either directly or under contract by AT&T.
The impact on retirees of these losses has been profound.
- The death benefit paid to surviving spouses from the pension fund was cancelled
o And your 2003 letter explained, “Eliminating the death benefit … reduces the likelihood that we would have to make a contribution to the plan in the near future….”
- Healthcare cutbacks were instituted because pension transfers were no longer possible
o 100% of management retirees lost dental benefits
o 100% of Medicare eligible lost Part B reimbursements
“…In return for using pension plan assets in this way, the company had to maintain for five years the average cost per participant...”
What your letter doesn’t mention is that the five-year period ends in September, 2006, which is the very next enrollment period. Frank D’Amelio explained it this way to financial analysts recently:
» For management retirees, after 2006, the majority of the [healthcare] benefit becomes discretionary to the company
And at the Lucent shareholders meeting on February 15, 2006, you answered a question does Lucent have a specific plan for retirement healthcare with the comment that Lucent does not. Omitting any mention of healthcare planning for after September 2006, when it’s a topic of discussion with shareholders and financial analysts, leaves retirees deeply worried that they may be in for a painful surprise. This defeats the purpose of your letter to put retirees minds at ease.
“…this refund was paid from the general assets of the corporation, not the pension trust.”
We accept that the refund came from the general assets of the corporation. But in the December 2004 10K, Lucent stated:
» We received $212 million from our welfare benefits trust in October 2004
At a January, 2005 meeting the LRO learned from Lucent that the “welfare benefits trust” was the original life insurance trust that pays for life insurance for management retirees. And that the IRS had given permission for a tax-free transfer of assets conditioned on the funds being
» … deposited in a separate postretirement health benefit account within that [life insurance] trust
That means the moneys would be used for future healthcare payments to management retirees. Since the moneys were received directly as a corporate assets, one conclusion is that for every $1 paid back to retirees, Lucent retained $15 from the trust fund. And all these assets were transferred to Lucent by AT&T for the sole purpose of life insurance payments.
The December 2005 10K revealed that an additional $200 million had been reimbursed to Lucent for healthcare benefits from what was the original life insurance trust.
The LRO has been asking for a year to have a simple accounting of the assets and liabilities of their life insurance trust. Lucent has repeatedly refused. On page F-60 of the report that you recommended retirees read, Lucent lists the cumulative assets and obligations of postretirement benefit as line items, and these include the life insurance trust. Certainly, someone in Lucent’s accounting department must have a spreadsheet with the individual trust assets and their obligations. These two amounts are all we’ve been asking for so retiree will know whether there are adequate assets to meet life insurance obligations.
Pat, will you assure retirees in writing that their life insurance is secure, as we’ve been asking you to do for a year? Or at least tell retirees what are the assets and obligations of the trust that is held for their “exclusive benefit”. Please do that now – retirees’ families need to know.