Ken Raschke Reports LRO Team’s Perspective On Lucent Meeting

LRO leaders held their third meeting of the year with Lucent executives on August 16 in Murray Hill, NJ.  I want to thank Chuck Graves, Bill Kadereit and Herb Zydney for their efforts in preparing for and attending the three-hour meeting with me.  They devoted countless hours to research, consulted with pension experts and lawyers in preparing their presentations and questions.  Our focus was on gaining more information from Lucent on pension and life insurance security and endeavoring to learn what is ahead for health care and prescription drug benefits.

            We were aware when the meeting date was established that Lucent Chairman and CEO Pat Russo would not be at the meeting due to vacation plans.  We appreciate that Pat made available key members of her team for the meeting.  They included John Hickey, Vice President of Human Resources; Collette Chilton, President of LAMCO, a wholly owned Lucent investment company; Bill Carapezzi, General Counsel; Steve Kronheim, Attorney, and Mary Lou Ambrus, Group Communications Vice President.

            Before getting into the specifics of the meeting, I want to provide some background.  LRO members who have followed the exchanges with Lucent over three years are aware that Lucent and the LRO have fundamentally different perspectives as to pension plan security and retiree healthcare benefit maintenance. These differences came to a head with the publication by Lucent in November 2004 of a “Facts” mailing, and LRO’s response to “set the record straight.”   Both may be seen in the LRO Website Library section under the heading “LRO Activities Archives” with the headline LRO Sets The Record Straight On Lucent’s “Facts” Mailing.

The LRO’s response to the Lucent mailing reiterated our deep concern about pension fund security, specifically big losses of more than $9 billion in a two-year period (fiscal years 2001 and 2002), transfers of irreplaceable moneys out of the pension fund, and Lucent’s allocation of a large majority of the pension assets to equities and other risky investments. Lucent also declined the LRO’s request to use different auditors for Lucent’s corporate books and the Lucent Pension Plan – permitted in current ERISA law but posing an obvious potential conflict of interest for the auditor that undermines retirees’ trust.  Regrettably, the additional 9 months of dialog since the November 2004 exchange of viewpoints has not lessened our deep concerns for the security of the pension plan and other benefits.

 Now I want to turn to details of the August 16, 2005 meeting plus provide comments on the LRO’s proactive stance on pensions, life insurance, healthcare and prescription drugs using experts, media and every other option available to us.

 A primary concern expressed by LRO representatives at the meeting was that Lucent reported in a recent 10-K filing with the SEC (Securities and Exchange Commission) that at the end of Lucent’s last fiscal year on 9/30/04 the management pension fund based on FASB (Financial Accounting Board Standards) calculations was $1.7 billion underfunded.  (Fortunately, for represented retirees that pension fund was $2.8 billion overfunded at the end of the 2004 fiscal year based on FASB calculations.) 

The Lucent representatives discussed with us their views as to why they consider the management pension plan to be fully funded.  Lucent’s representatives maintained that its pension plans are fully funded under rules and regulations required by ERISA (Employee Retirement Income Security Act of 1974).  Lucent argues that its pension funding situation is different from those facing, for example, United Airlines in three respects: 1) Lucent does not have or use “credit balance” dollars that allow a company to escape its funding obligations. 2) Lucent’s pension and pension-eligible population is “mature,” thus predicting that Lucent’s pension liabilities are shrinking. 3) Lucent has no significant “lump sum” pension payment exposure which could draw down the pension asset base precipitately as has happened with other companies’ plans.

The Lucent representatives continued to question why the LRO has not joined Lucent in assuring retirees that the pension plan is “secure.”

We agree with Lucent that United Airlines’ problems are different from Lucent's.  But we're still left with Lucent insisting we believe ERISA data when just about every regulator and legislator believes that the ERISA rules for today’s pension plans are totally inadequate.

Lucent’s explanation of how the $1.7 billion deficit in the management pension plan will be filled fell far short of satisfying us.  The LRO has engaged an actuary and other pension experts and we need more details from Lucent to fully understand how well the pension plan is funded.

We told the Lucent team that we remained concerned about how Lucent manages the assets for our retirement. We explained to Lucent that it's clear to us that the more than $9 billion loss in managing the pension fund early in this decade led directly to the death benefit cancellation for all management retirees.  And little or nothing has changed in the way they run the pension fund.

            Lucent continues to aggressively manage the pension plan in order to seek returns that will put off having to make contributions to the pension plan from the Lucent treasury.  Lucent does not share the LRO’s concern over the real downside of riskier investments in today’s uncertain world.

One of the Lucent executives in the meeting made clear that for Lucent to have to contribute to the pension or a benefit plans would be a “misallocation of scarce resources.”


            During our discussion on the Life Insurance Trust, we learned that Lucent has changed the Life Insurance Trust to a Life Insurance and Health Care Trust.  In 2004, Lucent obtained approval from the IRS to take $212 million from this trust to reimburse the company for retiree healthcare expenses.  These actions are of concern to the LRO and we have asked Lucent to assure retirees that their Life Insurance benefit is secure.  We will continue to track this important issue with Lucent.

            As you know, Lucent traditionally announces its health care and prescription drug benefit plans for the coming year in mid-to-late September.  Lucent would not disclose what it intends to do with health care and prescription drug benefits in 2006.  Of particular interest to the LRO is how the Medicare Prescription Drug Act that cuts in on January 1, 2006 will impact Lucent’s prescription drug plan next year—if at all.  We’ll all just have to wait until the enrollment information is released by Lucent.  The LRO has a team in place to review the enrollment form and take whatever action is needed to insure that retiree’s interests are protected.

            Lucent stated that it has three universes of obligation—shareholders, employees and retirees—that are inextricably inter-related. The LRO wants to make sure that retiree pension and welfare benefits are not subservient to the other two.  We want to help Lucent recognize that they have a moral duty to retirees beyond the legal obligations.


Ken Raschke, LRO President