A Pension Rule, Sometimes Murky, Is Under Pressure











  • On Nov. 10, FASB approved a pension accounting project to
    “improve transparency and usefulness for investors, creditors, 
    employees, retirees, and other users of financial information.” 

  • This is good news for employees and retirees of employer pension plans.

  • This may not be so good for employers whose pension funds are underfunded
    by FASB standards (such as Lucent)

  • The goal of this summary is provide a contrast in the views of Lucent and the LRO so that employees and retirees can reach their own conclusion on whether the LRO's efforts are an "unjustified crusade."


The background for The Times article
· The LRO was invited to provide comments in a New York Times article on pension accounting reform. Herb Zydney, a Board member, was the spokesman. The article has been met with a letter from Lucent that has very different views on the intent behind the LRO’s contribution. The LRO believes that this difference can be very beneficial to retirees and others, as it works to engage the Lucent Board of Directors on issues important to all its stakeholders.
· Lucent’s responded to the article by publishing a letter on its Website, addressed to employees and retirees. The letter did not comment on the focus of the article--pension accounting reform. But Lucent did make a number of statements with sweeping generalities and termed the LRO’s efforts to protect retirees pensions an “unjustified campaign.”

Herb Zydney’s comments in The Times

· Lucent senior executives did spend a number of hours meeting with LRO leaders in two meetings in 2005. The LRO appreciates the investment of their time. And this was publicly acknowledged in the closing paragraph. But there were no meetings in 2004 because Lucent refused to meet with the LRO and its consultant to discuss health care, including an unaudited $600 million loan in the health care trust. 

For those interested in the references for all of Herb Zydney’s comments that were quoted in The Times, there’s a “source document” attached.

The Lucent letter posted on its website

· Lucent posted it’s website letter shortly after The Times article appeared. The reporter who wrote The Times article included comments from a noted Wall Street analyst and a Harvard Business professor, as well as her own research. The LRO is mystified why Lucent associated all its criticisms with the LRO, because the majority of their comments are related to other interviewees. If this were a news article, we’d be asking for a retraction. The LRO doesn’t disagree with everything that’s presented in the letter – but what’s not presented in the letter is what retirees really need to know about. 
Lucent's topic: Pension disclosures and transparency
  • $1.71 billion shortfall: Lucent’s most recent filings with the SEC report a $1.71 billion short fall in the management pension plan, more than 10%. For most of the year, the LRO has indeed been on a “crusade”, so to speak, to have Lucent explain in simple terms what the impact is on retirees pension. The website letter would have been a great place to include that explanation. The LRO, and all retirees, are extremely disappointed that Lucent continues to pretend that this shortfall doesn’t exist, and simply classify it as an “unjustified crusade.”
  • Actuarial errors: One of the key documents used in determining whether a pension plan is properly funded is the actuary’s report (called Schedule B). The LRO’s enrolled actuary reviewed the most recent filing and noted four unusual footnotes. These were discussed with Lucent in August, and we asked for a detailed response, which has not been received. We do note that ten weeks after our findings, Lucent notified the SEC that there were, in fact, actuarial errors in the filing. The LRO is waiting to read the final report, due in November, before a next step.
Lucent's topic: Executive compensation and pension impacts
  • LRO is sponsoring a new pension credit resolution: There were no LRO quotes in  the Times on this topic. Separately, the LRO Board continues to be disturbed by the way credits from the retirees’ pension fund are applied to executive compensation, in contrast to the letters assertion. Jim Stickel will be presenting a resolution at the next shareholders meeting to clamp down on the practice of using non-cash accounting credits from retirees' pension funds in calculating executive compensation. Frank D’Amelio would likely be aware of that item being on the shareholders agenda.
Lucent's topic: Pension asset allocations and assumptions
  • Pension plan performance: The website letter refers to a 10-year return on assets. For five or more of those years, AT&T was the asset manager of the pension fund. In contrast to Lucent’s statement that “their returns have generally outpaced our assumptions”, in the 4 years of Lucent’s control, the losses exceedede assumptions by $`13 billion. The chart, below, depicts the most recent four years under Lucent’s management as compared to the other top US pension funds. Lucent ranks nine out of ten, and its performance is far poorer than AT&T’s. During two of those years, Lucent lost $9.3 billion from the retirees pension trust fund.
  • Retirees have paid a big price; shareholders may too: Retirees have borne the brunt of these losses – the death benefit (paid from the pension fund) has been eliminated and health care costs are rising dramatically because the assets have fallen so low. The LRO shared with Lucent data that the management pension fund payouts are $300 million more than Lucent’s current projected rate of return because of the asset losses. So shareholders may soon have to pick up a large share of the annual $300 million.
  • Let’s find out why: Mercer, a Lucent consultant, has said “Comparing your [pension] results to your peers can help provide a context for a business within which funding, risk management, and plan governance can be prioritized and better managed.” We’re asking the Lucent Board to do just that.
  • Private equity lost money in Lucent’s recent filings: Lucent’s latest filing (called a Schedule H) shows 9 categories of investments. The only category to report a loss is private equity. And a respected trade journal reports that Lucent is #1 of all pension funds in such investments, on a weighted basis. We’re recommending to the Audit Committee of the Lucent Board that the auditor, in his reports to plan participants, change his reporting practices.

Lucent's topic: SEC investigations

  • · $25 million: There were no quotes from the LRO on SEC investigations. Lucent brings up in its letter—almost as if it were a badge of honor—that the SEC’s investigation of Lucent’s revenue recognition issues was resolved in May 2004, with the announcement of a consent decree. For those who may not remember, Lucent paid a fine of $25 million out of the pockets of shareholders to make that problem go away. The fine remains one of the largest ever levied by the SEC.
What next?
· Lucent website’s letter calls the efforts of the LRO an “unjustified campaign.” After you read the details in the document that the LRO has prepared, you can draw your own conclusions on whether the LRO is justified in its campaign to do everything it can to scrutinize and press for change in Lucent’s management of our pension, health care and life insurance plans. Click here to read the document. 
· Clearly, we need to move forward from here in the interest of all stakeholders. We see three steps that can have material benefit to all stakeholder: retirees, employees and shareholders.
  • We feel one of the contributors is Lucent’s clear and critical focus on controlling costs in the business, based on the data that accounting standards require. The focus of the original Times article was on the accounting changes to “… improve the usefulness of pension accounting for investors, creditors, employees, retirees and other users.” When in place, that will expand Lucent's ability to provide answers to basic questions. FASB has accepted the LRO’s offer of being a contributor to this process.
  • A second factor may be what experts call the “two hat” role – employees use a ‘fiduciary hat’ when they deal with the pension plan; a ‘business hat’ when they deal with corporate issues. We note that Lucent’s very commendable “Business Guideposts” establishes a code of conduct for employees and the Board of Directors in the corporate role. The LRO is recommending to the Lucent Board of Directors, as named fiduciary of the pension plan, that the Guideposts be expanded to include guidelines for the “fiduciary hat” role for the benefit of retirees and vested employees.
  • A third factor is the excellent qualifications of the Lucent Board. Roger E. Denham is chair of the Financial Accounting Foundation, which has oversight of FASB. And Richard C. Levin, President of Yale University, oversees a “best in class” endowment fund. The LRO believes that the Board, as it reviews this dialog in its role as named fiduciary of the Pension Plan, will sense an urgent need to move to a common purpose for all its constituents, based on respect for the individual and a commitment to responsiveness. Congressional Pension Reform and the FASB initiative amplify the urgency. The LRO stands ready to restart the dialog with their support.