LRO Comments On Points Stated In Letter From Lucent’s Corporate Attorney


Lucent’s corporate attorney, William R. Carapezzi, Jr., stated five points in his March 8, 2006 to LRO President Ken Raschke.  The LRO’s open comments to those points are as follows:


Lucent’s Statement:

  1. Lucent’s pension plans under the federally mandated ERISA rules (which govern whether we need to put funds into the pension plans) are adequately funded and currently require no cash contributions: if the funding law changes we will advise our retirees of the impact on our funding status.


LRO’s Comments:

The Master Plan lost $12.9 billion over four years.  Via the transfer of pension assets from the fund, about $2 billion came from the payment of such items as severance pay, layoff allowances and some health care costs . The remainder was lost as the result of the equity market decline coupled with LAMCO's (Lucent’s wholly owned investment company) actions in selling bonds and buying stocks during that decline.

The foregoing $2 billion directly affected the Lucent Retiree Income Plan (LRIP). Even on an ERISA basis, the LRIP was below 100% by late 2002. The union plan was 120% (now 138%). To avoid funding the LRIP, Lucent elected to cancel the Death Benefit which, at that time, approximately represented a $428 million liability, By so doing, the plan became "fully funded" under ERISA and Lucent avoided having to contribute funds that would put a significant strain on the company’s finances.

However, a review using FASB reporting (which is more conservative) showed the 2003 year-end shortfall to $1.6 billion for the LRIP. 

In 2004 the combination of stock market appreciation and liability changes served to reduce the FASB shortfall to $1.2 billion. So, if 2005 proves to be as good as 2004 and 2006 performs likewise, perhaps, sometime in 2007, there might not be a shortfall even on the basis of the FASB calculation.



Lucent’s Statement:

  1. Retiree health costs have been and remain an area of concern.  We have been very open and clear about our ability to afford rising healthcare costs and our need to address this issue to remain competitive.  For FYE 2005, we provided retiree health benefits at a cost equal to 8% of revenue.  This is a very significant contribution level for a company our size.  The company must continue to balance supporting retiree health with what is affordable.


LRO’s Comments:

As far as the LRO’s research of Lucent’s filings with the SEC can determine, health benefits costs for retirees are, as Mr. Carapezzi states, equal to 8% of revenue. (Eight percent of Lucent’s more than $9 billion in annual revenues would equate to nearly $800 million.)  What Lucent doesn’t say is that only a small portion of that amount actually comes from Lucent’s operating expense.  Between 1999 and the end of 2002, Lucent withdrew $1.2 billion from its then pension plan “surpluses” to pay for retirees' healthcare expenses (plus employee severance packages during its restructuring).          

Data that the LRO has found showed that Lucent spent approximately $13 million from its cash for retirees’ healthcare in fiscal year 2004 after it applied monies from various trust fund sources.  In fiscal year 2004, Lucent reimbursed itself $211 million from what was originally the life insurance trust fund that Lucent had converted to a joint life insurance and healthcare trust fund.  The LRO has no reason to believe that Lucent’s operating fund expenditures for retirees’ healthcare in fiscal year 2005 was much different from a year earlier.  The company once again tapped what was the original life insurance trust for $201 million in fiscal year 2005.   

An additional fact is that retirees contribute about $190 million annually from their pension checks for healthcare insurance premiums to Lucent who is self-insured.  The LRO has repeatedly asked for an accounting of how retirees’ premiums are spent.  Lucent has refused to provide this information.  Management retirees wonder why their healthcare premiums went up as much as 30% to 100% in 2006 when Hewitt Associates, a Lucent healthcare services partner, issued a report on October 10, 2005 projecting a 9.9 percent average increase in health care costs in 2006.    


Lucent’s Statement:

  1. The performance of our pension assets, despite the LRO’s claims to the contrary, have been quite good.  In fact, the 10-year return has been better than 90% of the TUCS universe, a widely accepted benchmark for the performance of pension funds.


LRO Comments:

It’s good news that the pension plan performed well last year. Using Lucent’s 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.  The following chart based on data from Lucent’s 10-K filings with the SEC depicts how Lucent’s pension fund went from a surplus to a deficit in three year’s time.




Lucent’s Statement:

  1. We currently have no plans to change the life insurance benefit.  It has not been and is not presently under consideration for any change.  When asked to commit in writing that it will never change under any circumstances you will recall that Pat said at the Annual Meeting that she could not make that commitment.  She further stated that she is unable to predict events that may force a different answer so it would be “irresponsible to commit that there will never be any changes no matter what.”


LRO Comments:

It is good to see a statement in writing from a Lucent executive stating that Lucent currently has no plans to change the life insurance benefit.  Retirees then wonder why Lucent has turned down the LRO’s request to provide a statement on the assets and obligations of the life insurance plan.  Only by knowing that there are sufficient assets to pay all life insurance benefits, can retirees feel comfortable that their survivors will receive the moneys essential for their financial security.

Why would it be irresponsible for Lucent to commit that there will never be any changes to life insurance no matter what?  Life insurance is intended to be one of those elements of our society that is designed to remove the uncertainty of what financial resources loved ones will have after a person’s death.  That is why Lucent should never have changed the original the life insurance trust – a trust that was fully funded to meet life insurance payment obligations.

Many retirees have been paying income tax on the life insurance benefit for years or paid the tax in advance when they retired.  Based on this, they have believed that the life insurance benefit was a certainty.  They wonder why it isn’t 100% certain their survivors will receive what was promised to them? 


  1. We have tried on several occasions to engage in a constructive dialogue: it has gone nowhere and has been used by the LRO leadership to generate negative publicity statements that have been incomplete and in accurate.  The LRO is now supporting multiple lawsuits against the company.  For that reason, we cannot engage in any further dialogue as the matters you care to discuss are related to these suits.


LRO’s Comments:

The LRO does appreciate that Lucent executives met with LRO leaders a few times in 2003 and 2005.  We are disappointed to learn for the first time that Lucent executives felt that the meetings had “gone nowhere.”  Apparently, Lucent didn’t place any value on the input that the LRO provided on questions and concerns from retirees.  And, Lucent ignored the LRO’s repeated offers to work jointly with Lucent on various projects, including ways to reduce healthcare costs and cooperate in efforts to gain the passage of federal legislation that would be beneficial to Lucent and retirees.

The LRO disputes Mr. Carapezzi’s allegation that meetings were used by the LRO leadership to generate negative publicity statements that were incomplete and inaccurate.  A point of contention between the LRO and Lucent was that the LRO was not willing to sign a non-disclosure agreement with Lucent to receive proprietary information.  Therefore, the LRO never received any proprietary information from Lucent.  Any statements that the LRO made to the press were based on public information.  If Lucent considers press coverage generated by the LRO as negative then Lucent only has its own actions to blame.  As far as the LRO knows, reporters who have quoted an LRO leader have always given Lucent an opportunity to tell its side of the story.  And Lucent has no shortage of PR people on its payroll.

Mr. Carapezzi’s stated: “The LRO is now supporting multiple lawsuits against the company.  For that reason, we cannot engage in any further dialogue [with the LRO] as the matters you care to discus are related to these suits.”  The LRO views this as a convenient excuse for Lucent to not address the tough questions the LRO has been asking. 

It is disappointing that Lucent would take this position as a result of the LRO’s support of retiree causes in legitimate court proceedings and not withstanding that LRO is not, and cannot be, a plaintiff in these lawsuits since the LRO does not have standing in the eyes of the courts.  Lucent is obviously attempting to prevent the LRO from seeking explanations for a wide range of issues affecting retirees that have nothing to do with issues being litigated.  We hope Lucent will reconsider its position to not engage in any further dialogue with the LRO and its nearly 10,000 members.

Further, during our first meeting with Lucent in 2003, Ken told them that the elimination of the Death Benefit was wrong and that the LRO was going to do all that it could to have it reinstated.  Ken also said that he hoped that we could work together on issues that would be beneficial to Lucent because that was in everyone’s mutual self-interest.  The issue of finding ways to work on Lucent’s behalf has been brought up at every meeting. Lucent agreed to consider that offer but never followed through.


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