Why Lucent Retirees Are Concerned...

What's a retiree to do when we read almost daily about corporate scandals and that companies have defaulted on their committed pensions and other earned benefits?  How can a retiree not worry when we read about the following?  

Corporate Scandals

Enron, the world's largest energy trader, collapsed in December 2001 in the biggest bankruptcy filing in American corporate history.  Arthur Anderson, the giant international auditing and consulting company that was auditing Enron's corporate books failed to be the watchdog for investors, resulting in its demise and leaving large numbers jobless.  Global Crossing, burdened by a $12.4 billion debt, became the largest U.S. telecom firm to file bankruptcy in January 2002.  WorldCom had artificially inflated its earnings by $3.8 billion before it filed for bankruptcy June 2002. Adelphia Communications, the cable company that had loaned billions of dollars to the founding Rigas family, defaulted on its $7 billion debt and filed for bankruptcy in June 2002.

PBGC Takes Over Numerous Pension Plans – A Few Notable Examples

(Note: The Pension Benefit Guaranty Corporation (PBGC) ensures that retirees continue to receive monthly pension checks but only up to guaranteed federal limit which may easily be under half of the original pension amount a retiree had been receiving from his/her company depending upon age at retirement.)

LTV Corp. - March 29, 2002 - 82,000 workers and retirees.  Polaroid Corp. - September 12, 2002 - 11,000 former employees and retirees.  Global Crossing - November 24, 2002 - 5,500 workers and retirees.  Bethlehem Steel - December 16, 2002 - 95,000 workers and retirees - pension plan ranks as the largest assumed by the PBGC in its 28-year history, both in terms of the number of participants and the amount of underfunding--$4.3 billion.  US Airways -  April 1, 2003 - 6,000 pilots and retired pilots. Enron - PBGC announced on June 3, 2004 that to protect the participants in the underfunded pension plans of Enron Corp., the agency is initiating an action that it hopes will preserve all the benefits that Enron promised to its workers.  The procedural step taken by PBGC is designed to ensure that enough money remains available to fully protect the pensions of Enron's workers and retirees by placing the pension obligations with a private sector insurance company.

Excerpts From Significant PBGC New Releases

May 6, 2004

The PBGC today proposed an expanded enforcement program, including a new penalty structure, for administrators of underfunded pension plans who fail to inform participants of the plan's funding status and PBGC's guarantee limits.  

May 14, 2004

The ratio of active to inactive workers has fallen to roughly 1-to-1 in the defined benefit pension system, down from more than 3.5-to-1 in 1980. In percentage terms, the share of active workers in single-employer pension plans reached an all-time low of 51 percent in 2001, down from 78 percent in 1980. The PBGC's recent claims experience has been the worst in the Corporation's 30-year history, with $11.2 billion-or 63 percent-of all claims having been filed within the past three years alone.  

May 21, 2004

The PBGC's insurance program for pension plans sponsored by a single employer reported an unaudited deficit of $9.7 billion as of March 31, 2004, the midpoint of the agency's fiscal year. The PBGC's single-employer program insures the pensions of 34.5 million Americans in 29,500 plans.

Actions by Federal Government – Excerpts From News Articles

Wall Street Journal - March 16, 2004

How Cuts in Retiree Benefits Fatten Companies' Bottom Lines

Medicare's new prescription-drug benefit is giving companies a whole new source of accounting-generated income that boosts their earnings.  And some employers may get federal subsidies even after transferring costs to their retirees.

Reuters - April 10, 2004

Bush OKs Pension Aid to U.S. Companies

President Bush signed into law on Saturday a measure aimed at saving U.S. companies more than $80 billion in pension contributions over two years.  Businesses lobbied hard for the bill, which would provide about $80 billion in pension accounting relief through the end of 2005 for some 31,000 companies with traditional "defined benefit" pension plans. 

The New York Times - April 30, 2004

False Spin on Retirees
To the Editor:

Re "Agency to Allow Insurance Cuts for the Retired" (front page, April 23):

In the aftermath of our 3-to-1 vote to allow employers to reduce or eliminate health benefits for retirees when they become eligible for Medicare at age 65 (I was the dissenter), my colleagues are trying to paint a rosy scenario that does not ring true.
Having voted to allow age discrimination against older retirees, my colleagues now claim that the Equal Employment Opportunity Commission somehow acted to safeguard and preserve retiree health benefits.Nothing could be further from the truth.

The E.E.O.C. acted to allow discrimination, adding to the likely accelerated cutbacks of retiree health benefits. We have done a profound disservice to millions of older Americans who counted on the government to protect them from discrimination.


Washington, April 26, 2004

The writer is a commissioner of the Equal Employment Opportunity Commission.

Retirees Distressed About Lucent's Decisions And Actions

LRO Questions Lucent's Management Of Pension Trust Funds

Based on what the LRO has been able to determine from the limited information available on Lucent's management of pension fund assets, it appears that the company converted a large part of the pension fund to fixed income vehicles (bonds) just as the market was recovering and missed the approximately 29% run up of equities in 2003.

It is the LRO's opinion there have been numerous other blunders in the management of the pension trust funds. For example, in 2001-2003 while the market was obviously tumbling, Lucent held Common Stock investments constant and sold nearly $2 billion in "T" Bills.  At the same time, Lucent moved funds to high risk Joint Venture securities which later had to be sold for 20 cents on the dollar.   It has been alleged that much of the Joint Venture investments were induced by Lucent desire to fund cash-poor customers--many of who eventually went bankrupt still owing Lucent millions.

Because the LRO believed that Lucent has been inept in its management of the pension trust funds, the LRO submitted a proxy resolution intended to force Lucent to have independent fiduciaries direct trust fund investments free of Lucent oversight and interference.  However, Lucent was able to use procedural maneuvers to prevent this proxy from being placed before shareowners for a vote at the February 18, 2004 Annual Meeting.

Lucent's Reported Profits Include Income From Pension Funds

The Lucent pension trust fund--which was originally created by AT&T for the benefit of retirees--has served as a "piggy bank" resource for the corporation.  First, it generated pension income. When expected returns on the assets in a pension fund exceed current costs, the difference counts as company income. While this isn't spendable money, it fattens the reported profits that drive stock prices.

According to a Wall Street Journal article, in Lucent's first full year, ended Sept. 30, 1997, its earnings included $329 million of pension income. The figure more than tripled in fiscal 2000. After that, Lucent ran huge annual net losses, but most were narrowed by hundreds of millions of dollars in pension-fund income.

An exception was fiscal 2001, when the pension fund generated a billion-dollar accounting loss, thanks in part to the company's restructuring. In addition, accounting expense for other retiree programs, particularly healthcare, has lowered corporate income. But even after subtracting those factors, the net result was $929 million added to Lucent's bottom line over its eight-year history as a result of its benefit plans.

From 1999 to 2001, Lucent withdrew about $1 billion from pension-plan assets to pay for retirees' health care. This is perfectly legal.

Lucent also used its pension fund for severance. For example, in 2001, to induce older employees to take early retirement, Lucent offered them beefed-up pensions. Doing so raised Lucent's pension liability by $1.95 billion, which was a big part of the reason the plan hurt rather than helped earnings that year. But offering bigger pensions let Lucent shed workers at minimum cash cost.

In its medical trust funds for retirees, Lucent found another useful downsizing tool. The company encouraged older employees to leave by offering them accelerated health coverage in retirement.

Lucent has openly stated that the management healthcare trust fund was exhausted in 2003 and that the non-management healthcare trust fund will be exhausted in the 2006-2007 timeframe. 

From Lucent's spin off from AT&T in 1996 through 2003--for management retirees and through 2006-2007 for non-management retirees--the company has not paid a single dime for healthcare from company revenues nor has it had to raise cash to pay these bills. AT&T had already created the trust. 

In addition, Lucent moved hundreds of millions in "overfunded surplus" dollars from the pension trusts to healthcare trusts, then paid healthcare benefit payments from them in 2002 and 2003.  Under pension regulations, a "surplus" exists when a pension plan is funded at 125% or more.  The surplus came from an increase in equity values in the late 1990's and 2000-2001.  Lucent benefited by being able to claim these gains as a credit to net income. This was a legal but nonetheless, overstatement of earnings.  Management did nothing to earn this profit. 

Retirees are very nervous as to Lucent's next steps--2005 and beyond--on healthcare benefits. The company has lost its' free rides.  While Lucent bemoans healthcare costs, it announced on June 30, 2004 it will join the Irish government in sinking more than $83 million into a research and  development project in Ireland.  This will result in 120 foreign research jobs when hundreds have been laid off from Bell Labs in America in recent years. 


Lucent Refuses LRO's Requests For Meetings And Independent Audit

After months of extensive research into the reports that Lucent is required to file with federal agencies, numerous questions have emerged about which the Lucent Retiree Organization (LRO) has not been able to obtain satisfying answers from Lucent.   On May 10, 2004 the LRO requested a face-to-face meeting with Lucent executives and provided proposed agenda items on pension and health care trust issues.  Lucent turned down the LRO's good-faith effort to have a frank dialogue.  Instead, Lucent executives, lawyers, public relations staff members and possibly others jointly drafted a response to each of the proposed agenda items.  The LRO is disappointed that Lucent leaders elected to hide behind their written corporate spin rather than face us in a candid discussion.

On June 9, 2004, the LRO emailed a letter to Lucent Chairman and CEO Patricia F. Russo, requesting an independent audit of pension funds by auditors who are separate and apart from those who perform Lucent's normal corporate auditing functions.  I wrote to Ms. Russo that a truly independent audit is the only way that all Lucent retirees can have peace of mind that their future income is secure.

On June 11, 2004, Ms. Russo sent email a response turning down the LRO's request for an independent audit of the pension funds.  In rejecting the request, Ms. Russo stated: "PricewaterhouseCoopers LLP (PwC), serves as Lucent's Independent Auditor and performs an annual audit of the records and accounts of our pension plan as required under ERISA guidelines."

PwC is the same firm that audits Lucent's corporate books.  The LRO believes these simultaneous roles as the auditor of both the Lucent corporate books and the assets of the pension and benefit funds held for retirees have an inherent conflict of interest.  Lucent's pension fund has assets of approximately $30 billion.  This is equal to roughly twice the company's market capitalization.

Ms. Russo also stated: "The pension plan is audited in accordance with Generally Accepted Auditing Standards (GAAS) as directed by the American Institute of Certified Public Accountants, and the plan's financial statements are compiled in accordance with Generally Accepted Accounting Principles (GAAP) promulgated by FASB."  Apparently, these words are meant to assure Lucent retirees that all is well with their pension trust funds.  However, many retirees know that The American Institute of Certified Public Accountants offered a training course entitled "Lucent Technologies: A Case Study of Fraud and Earnings Management." One of the training components was called: "Aggressive Pension Fund Accounting" by Lucent.

Later in her letter, Ms. Russo noted: "The Board sets the overall investment strategy for the pension fund, which is the asset allocation decision for plan investments.  The Audit and Finance Committee of the Board reviews and recommends changes to the Board for funding policy and contributions to the pension plan." 

There are numerous reasons why the LRO questions the investment strategy for the pension fund.  One example is that in 2003, the LRO asked Lucent about the extraordinary large investments in Private Equity Ventures (PEVs). The auditing reports are unclear, but as much as $4 billion may have been lost in these transactions. In response to a question about the arms-length nature of these transactions, Lucent formally replied in writing:  "There was no Lucent affiliation -- past or present -- with the private equity investments, and to the best of our knowledge, no Lucent employee had any ownership or other interest in the private equity investments."  In the LRO Board's opinion, this Lucent disclaimer is so far below the conflict-of-interest requirements of most public and private bodies that it is great cause for concern about how the Lucent Board oversees disclosure rules for such investments.

Lucent retirees were distressed to read reports on May 17, 2004 from the Securities and Exchange Commission of the $25 million fine it imposed on, and accepted by, Lucent for alleged fraudulent and illegal financial actions. Lucent's agreement to pay the SEC fine coupled with the dramatic decreases in pension fund values have caused retirees to wonder whether or not Lucent has something to hide by not agreeing to an independent audit. 


Lucent Cuts Retirees' Benefits

The New York Times - November 20, 2002 - Excerpts

Another Cloud on the Horizon for Lucent Retirees

They have already watched their 401(k) savings evaporate, stood by as offices were closed, seen countless jobs disappear. But now, tens of thousands of Lucent Technologies retirees sense that the pain is not over yet.

As Lucent struggles to cut costs and meet its obligations, the next thing that they fear will be lost is retirement medical coverage, a valuable benefit that more than 100,000 retirees now receive from the company.

Lucent Death Benefit ERISA Litigation

On October 23, 2003, a Lucent retiree filed suit in the United States District Court for the District of New Jersey challenging the decision by Lucent to eliminate death benefits that were payable to certain beneficiaries under Lucent's pension plan for its management employees.  The death benefit, equivalent to one-year's pay for those who retired before 1998, was eliminated by Lucent on February 1, 2003, with less than one month's notice.

There are currently a total of three cases challenging the elimination of the death benefit pending in the District of New Jersey. The three cases are assigned to U.S. District Judge William G. Bassler and U.S. Magistrate Judge Madeline C. Arleo. It is anticipate that the three cases will be consolidated in the near future.

New Jersey Star-Ledger - September 9, 2003 - Excerpts

Lucent to cut back retirees' health benefits

Lucent Technologies yesterday said it is trimming retiree health-care benefits to save as much as $75 million a year, and more cost-saving moves are expected in the years ahead.

The reductions affect 50,000 management retirees who will no longer be reimbursed for some Medicare premiums, dental coverage or certain subsidies for dependents, the Murray Hill-based company said in a filing with the Securities and Exchange Commission. Starting next year, the average out-of-pocket expenses for those retirees will rise from a range of $75 to $190 a month to as much as $370, the company said.

Chicago Daily Herald - September 12, 2003 - Excerpts

Retirees angry at Lucent for cuts

The Lucent Retirees Organization Thursday lashed out at Lucent Technologies after the struggling telecom slashed medical benefits to management retirees to save about $75 million annually.

"Lucent executives inflict pain time after time on retirees and continue to pay themselves excessive salaries and maintain their expensive perks in the absence of a return to profitability," LRO President Ken Raschke said in a prepared release.

Over the last five years, Lucent has made other changes to retirees' medical coverage, including increases in co-payments.

Dow Jones Newswire - September 29, 2003 - Excerpts

Lucent Retirees To Meet Former CEO Over Benefit Cuts

Lucent Technologies is putting one of its former CEOs on the hot seat to defend benefit cuts at the company.  Former Lucent Chairman and Chief Executive Henry Schacht - currently a company director - will represent it at upcoming nationwide meetings with retirees to discuss health-care and pension cuts made this year.

Moves that have inflamed retiree anger include Lucent's decision to stop reimbursing some 50,000 management retirees for Medicare B premiums, eliminate dental coverage, and discontinue health-care insurance subsidies for many retiree dependents, according to the Lucent Retirees Organization, a group that formed earlier this year after the company said it would cut death benefits for spouses.

In a letter to Schacht, LRO president Ken Raschke voiced criticism of the cuts in light of the large salaries Lucent executives still receive.

"Lucent executives continue to draw multimillion-dollar salaries, retention bonuses and pensions - all on the backs of its retirees, without whom there would be no Lucent," Raschke wrote in the letter.

Bloomberg News - February 26, 2004 - Excerpts

Lucent's Russo Seeks to Cut $850 M ln Retiree Health-Care Cost

Lucent Technologies Inc. the largest U.S. maker of telephone equipment is seeking ways to cut its $850 million annual retiree healthcare bill an amount almost three times its estimated profit this fiscal year. Chief Executive Officer Patricia Russo has yet to detail how she plans to lower the cost of coverage for the company's 230,000 U.S. retirees and their dependents. The benefits will be an ``issue we're going to have to address'' when Lucent negotiates a new agreement with its 4,000 union employees this fall spokesman Bill Price said.

Through last year retiree medical dental and prescription drug coverage was paid by trusts inherited during Lucent's spinoff from AT&T Corp in 1996. The trust supporting management retirees ran out and unless changes are made Lucent will contribute $240 million this year and $300 million next year Price said. A trust that supports health benefits for retired union workers is expected to run out in fiscal 2006 or 2007 Price said.

Wall Street Journal - March 29, 2004 - Excerpts

How Lucent's Retiree Programs Cost It Zero, Even Yielded Profit

Henry Schacht, Lucent Technologies Inc.'s former chief executive and still a director, met with retirees in 10 states last fall to explain why Lucent was cutting their medical and life-insurance benefits.

But an examination of Lucent's government filings shows that having a disproportionately high number of retirees hasn't been a problem for Lucent. In the first place, thanks to three benefit and pension funds that Lucent was born with when spun off from AT&T Corp. eight years ago, the big provider of telecom gear never had to dig into its own pocket to pay benefits for U.S. retirees. The funds paid every cent, both of pensions and of retirees' health care.

In addition, Lucent has been able to use assets in these funds to help it pay for repeated rounds of downsizing.

Moreover, the benefit plans -- thanks to accounting rules -- have fed Lucent hundreds of millions of dollars of income. And through a separate accounting maneuver, the cuts that Lucent made in the benefit plans last fall will contribute hundreds of millions of dollars more in income over future years.

In short, in most years the pension and retiree benefit plans have enhanced Lucent's earnings, not burdened them. But now that the surplus in the biggest fund is essentially gone, Lucent is faced with using some of its own cash to pay retiree benefits, and it is cutting those benefits.

The Lucent story is a case study of the often-bewildering world of retiree benefits. Contrary to a common perception, having a high ratio of retirees to employees doesn't necessarily raise a company's benefits burden. Lucent also shows the sundry ways companies can actually profit from their retiree plans, both to relieve demands on their cash and to produce new income that burnishes the bottom line. 

The New Jersey Star-Ledger - July 2, 2004 - Excerpts 

Lucent and union paint bleak picture on pact talks

Retiree health-care coverage is one problem area

Lucent Technologies was so eager to wrap up a new labor pact this summer that it began negotiating with union officials months earlier than expected.

But after two weeks of talks, the two sides have made such little progress, they may break off bargaining efforts until October, company and union officials say. The current labor contract runs out on Halloween.

A major sticking point is retiree health-care benefits, an increasing burden for Lucent. The Murray Hill-based telecommunications gear company is looking to eliminate dental coverage for retired union workers within four years, and to sharply increase their out- of-pocket expenses for other care, according to the Communications Workers of America, the company's main union.

Lucent expects to pay $240 million out of operating expenses this year for management retiree health-care costs, a number expected to rise to $300 million for the next two years.

The crunch is expected to get much worse in 2007, when a fund the company set aside to take care of similar costs for its 77,000 union- represented retirees is expected to run out. During Lucent's previous round of labor negotiations last year, union officials agreed to some benefit cuts in exchange for a company contribution of $76 million to the fund.

Lucent Executives' High Compensation vs. Performance

Dow Jones Newswire - December 3, 2003 - Excerpts

Lucent Technologies Boosts CEO Russo's Bonus by 80%

Lucent Technologies Inc.'s return to profitability earlier this year helped increase its chairman and chief executive's annual bonus by 80%.

The Murray Hill, N.J., telecommunications-equipment maker paid CEO Patricia F. Russo a bonus of $3.2 million for the latest fiscal year, compared with a bonus of $1.8 million a year earlier, according to documents filed with the Securities and Exchange Commission. 

Ms. Russo was paid $1.2 million in base salary. Her base salary for a year earlier was $887,692. Ms. Russo was appointed president and CEO of Lucent in January 2002. She was named chairman in February 2003.

Lucent also awarded Ms. Russo options to purchase 2.5 million shares of company stock at $1.42 a share. The options expire Dec. 15, 2009. She had slightly more than 3.8 million in exercisable options and almost 7.9 million in unexercisable options as of Sept. 30.

The Wall Street Journal - March 8, 2004 - Excerpts

Worst 5-Year Performer: Lucent Technologies

For the second year in a row, the maker of telecommunications equipment ranks as the worst five-year performer in the Shareholder Scoreboard. With an average compound annual return of minus 41.6%, a $1,000 investment in Lucent at the end of 1998 would be worth a measly $68 five years later, compared with $972 if the same amount had been invested in the Standard & Poor's 500-stock index.

Forbes - May 6, 2004 - Excerpts

Lucent Throws A Pay Party

Lucent Technologies may be a shadow of its former self, but there is one place where this company still puts world-class numbers on the board, and that's executive compensation.  In two years since becoming chief executive, Patricia Russo has received compensation worth more than $44 million.

And since January 2002, when Russo rejoined Murray Hill, N.J.-based Lucent as chief executive, her four top lieutenants--all Lucent lifers--have received "cash retention payments" totaling $10 million to keep them from leaving.

Moreover, in fiscal 2003 these four executives--Frank D'Amelio, William O'Shea, Janet Davidson and James Brewington--were paid salaries totaling $2.4 million and bonuses totaling $2.8 million. Plus they were granted 3.75 million options.

In addition, in 2003 Russo and her top four execs were awarded $3.5 million in long-term incentive plan bonuses that won't be paid until 2005. Ultimately Russo and her team could earn as much as $11 million from this three-year plan.

So how well has this dream team performed?

Lucent's share price has dropped 40% since Russo took over in January 2002--from $5.87 to $3.50--and the company has lost $10 billion in market value, falling to $15 billion. Russo says Lucent's market cap has shrunk because telecom spending has declined sharply during the past two years. (And to Russo's credit, during the 2003 fiscal year, which ended Sept. 30, Lucent's stock rose nearly 200% to $2.16 from 75 cents.)

How about earnings? In fiscal 2003 Lucent reported a net loss of $1.2 billion on sales of $8.5 billion. This year Lucent is expected to report a net profit, but there's a catch: The profit is being delivered by an accounting credit from a pension fund surplus, without which Lucent would post a net loss of several hundred million dollars this year. (Lucent argues that the pension fund credit has been an ongoing contributor to earnings, and that its earnings have been trending up.)

Some Lucent retirees are appalled by how much top execs are making, especially since Lucent, crying poor, slashed health benefits for its 127,000 U.S. retirees last year. "I think they should reduce salaries and perks to the officers," says Ken Raschke, president of the Lucent Retirees Organization, an activist group formed in 2003. "I think they ought to be a little more noble and make some sacrifice themselves."

Lucent Encounters Legal Problems 

Lucent News Release - March 27, 2003 - Excerpts

Lucent Reaches Agreement To Settle Shareowner Class Action Lawsuits

Lucent Technologies today said that it reached an agreement to settle all pending shareowner and related litigation against the company, its current and former officers and directors, and certain other defendants. The company did not admit any wrongdoing as part of the settlement.

The agreement is a global settlement of what were 54 separate lawsuits, including the consolidated shareowner securities class action lawsuit in the U.S. District Court in Newark, N.J., and all related ERISA, bondholder, derivative and state securities cases. The lawsuits alleged that the company violated federal securities laws and related state laws.

Under the agreement, Lucent will pay $315 million in common stock, cash or a combination of both, at the company's option. When the settlement proceeds are distributed, the company will also issue 200 million warrants to purchase an equal number of shares of common stock at a strike price of $2.75 with a three-year expiration from issuance.  Lucent will pay up to $5 million for the cost of settlement administration.


New Jersey Star-Ledger - March 19, 2004 - Excerpts

Ex-Lucent execs named in bribery suit

Senior leaders at Lucent Technologies used bribery and other illicit means to cut a Saudi Arabian company out of lucrative telecommunications contracts, according to an amended lawsuit filed this week in federal court in New York.

The suit by National Group for Communications and Computers, a Riyadh-based contractor, adds extortion and money laundering allegations to bribery charges in the original complaint, which was filed last August.

Lucent disclosed last year that the U.S. Department of Justice and the Securities and Exchange Commission were investigating potential violations of the Foreign Corrupt Practices Act because of the Saudi bribery allegations.

China Tech News - April 12, 2004 - Experts

Lucent Knows How To Play By Both Sets Of Rules

What do Chinese businesses really want? It seems Lucent has known better than most. Lucent this past week announced it sacked the top management of its China subsidiary based in Beijing. Apparently, these executives had been providing kickbacks and offering travel services to customers who bought Lucent's products.

It is not clear whether Lucent deserves credit for this voluntarily disclosure to the SEC or whether Lucent was forced to do so since the U.S. authorities were already looking into similar issues in Lucent's Middle East operations.

The New York Times - May 18, 2004 - Excerpts

Lucent Fined $25 Million by SEC in Fraud Case

The Securities and Exchange Commission accused Lucent Technologies and nine former and current employees yesterday of fraudulently reporting nearly $1.2 billion in revenue.  The accusations, made in a civil lawsuit filed in Federal District Court in New Jersey, come after a three-year government inquiry into Lucent's inflation of its sales figures dating back to the 2000 fiscal year.

Lucent, the nation's largest maker of telecommunications equipment, and three of the nine employees have agreed to settle with the government without admitting or denying wrongdoing. Lucent will not have to make any additional adjustments to its earnings statements, but it will pay a $25 million fine for not cooperating with the investigation, the largest penalty ever levied against a corporation for failure to cooperate.

The case against Lucent dates back to November 2000, when the company alerted financial regulators about revenues it improperly recorded. S.E.C. regulators ultimately found that $511 million in revenue and $91 million in pretax income were prematurely recorded in the 2000 fiscal year, which ended Sept. 30 that year. Another $637 million and $379 million in pretax income should not have been recognized at all.  Lucent subsequently restated $679 million in sales, an act that prompted 54 class-action lawsuits by investors, who said they were intentionally misled by the company.

A Lucent spokeswoman said three of the nine executives named by the government are still working for the company, but declined to name them, leaving open the question of whether some defendants are still making accounting and management decisions at Lucent.

Disturbing Headlines On Pensions & Benefits

The Christian Science Monitor - November 4, 2002 - Excerpts

Weak economy puts more pensions in peril

Like the heroine from the silent film saga, "The Perils of Pauline," the American economy faces yet another danger: underfunded corporate pension plans.

The traditional pension plans offered by 360 of the 500 companies in Standard & Poor's 500 index are underfunded by about $243 billion, according to a study by Credit Suisse First Boston.

The New York Times - September 30, 2003 - Excerpt


The number of people without health insurance shot up last year by 2.4 million, the largest increase in a decade, raising the total to 43.6 million, as health costs soared and many workers lost coverage provided by employers, the Census Bureau reported

Fortune Magazine - October 27, 2003 - Excerpts

Save an Arm and a Leg ; How can you prepare for soaring health-care costs?

When Ed Beltram retired in 2001 after more than 30 years as a manager at Lucent Technologies, paying for health care was the least of his worries. But then Lucent announced in September that it was slashing retiree health coverage, a move that means his monthly premiums will soar from $140 to $515. For Beltram, 58, it brought home a painful reality: "Lucent could eliminate all my health-care benefits," he says.

In time Lucent, along with the rest of corporate America, probably will. With health costs rising at their fastest rate in a decade, companies are taking an ax to retiree medical coverage. That's because seniors, who tend to have chronic health problems and are big consumers of prescription drugs, are simply more costly to cover than active workers.

The statistics are bleak. The percentage of large firms covering retired employees fell to 38% this year, from 66% in 1988, according to the Kaiser Family Foundation, a nonprofit research group. And large employers will pay just 10% of retirees' medical costs by 2031, according to Watson Wyatt, a consultant. That's down from more than 50% of total retiree medical expenses they pay for today.

Ironically the picture isn't likely to improve with congressional efforts to add a prescription-drug benefit to Medicare. The Congressional Budget Office estimates that as many as one-third of the 12 million Medicare recipients with retiree health insurance could lose their drug coverage under bills passed in June by the House and the Senate. That's because employers--who aren't required to cover prescription drugs for retirees--would have a clear disincentive to supplement the new drug benefit, leaving recipients with inferior coverage from the government, say health experts.

The bottom line? The Employee Benefit Research Institute (EBRI), a nonprofit research organization, figures that a 65-year-old who retires today without employment-based insurance and lives to age 80 can expect to pay well over $100,000 for health care.

The Washington Post - December 7, 2003 - Excerpts

A Lost Retirement Dream for Boomers?

There has certainly been no shortage of alarms sounded recently about the financial status of future American retirees, especially the giant baby boom generation, which begins turning 65 in 2011.

But a big new study released last week has now put some numbers on the shortfall -- and they are grim.
In the aggregate, retirees in this country in the year 2030 will be at least $45 billion short of the income they need to cover basic living expenses plus expenses associated with nursing-home or even home health care. From 2020 to 2030 the aggregate deficit will be at least $400 billion, according to the study, which was done by the Employee Benefit Research Institute here, in collaboration with the Milbank Memorial Fund, a New York-based foundation.

Those numbers may not seem very meaningful to individuals -- who can, and apparently do, say, "It won't happen to me." But they should make policymakers' hair stand on end, especially at the state level. They are what government in some form will have to come up with unless there is some breakthrough in medical costs or a substantial change in savings behavior by younger people. If those things don't happen, government will have to find the money or, as Milbank Memorial Fund President Daniel M. Fox said, "tolerate more human suffering."


Associated Press - January 14, 2004 - Excerpts

Hewitt-Kaiser Research Study: Companies Slash Retiree Health Benefits

Companies continued to slash retiree health benefits over the last year, with 10 percent of firms eliminating coverage for future retirees and 71 percent increasing retirees' contributions for their coverage, according to a new study.

The survey of 408 large companies released Wednesday found that a fifth of companies said they were likely to terminate health coverage for future retirees in the next three years. Eighty-six percent of companies said they would increase retiree coverage contributions over that period. 

The survey was conducted between June and September 2003 by benefits consulting firm Hewitt Associates and the nonprofit Henry J. Kaiser Family Foundation.

A separate Hewitt study of employers with more than 1,000 employees found that in 2003, 57 percent of firms offered health benefits to Medicare-eligible retirees, down from 80 percent in 1991.

The survey found the cost for employers and retirees for health benefits surged an estimated 13.7 percent, while the cost of providing health benefits to active employers rose 14.7 percent.


CBS MarketWatch.com - January 21, 2004 - Excerpts

The death of employee benefits

Commentary: Unfulfilled promises leave retirees on own

These are tough times to be an older retired American. Or even a younger working American for that matter.

In the past week, we learned that fewer and fewer employers plan to offer current workers any retiree health care coverage and that more and more employers plan to ask current retirees to chip in more toward their employer-provided retiree health-care premium.

Yes, older Americans are now paying the price for their years of helping former employers become great companies, for their years of helping this country become the economic powerhouse that it is. Sadly, the "contracts" that existed between worker and employers or citizen and government have been broken.

True, companies like Lucent have no legal obligation to pay for future or current retires health care. But having made the decision to offer such coverage, I would argue that the company now has a moral obligation to its current retirees or any current employees to whom it has made the offer to pay for such coverage.

Yes, many will argue that firms such as Lucent would suffer economically if it absorbed all of the rising health-insurance premiums for current and future retirees. Maybe Lucent would even go out of business. Well, too bad.

Whose fault is it that the company offered such an attractive employee benefit? The employees? No, yet that is who is being asked to pay for the mistake of the company's employee-benefits department. Frankly, it was the company's fault that it failed to project accurately future health-care costs.  

And now, retired employees, many of whom would have happily planned to pay for their health care needs had they known this was coming, are left holding the proverbial bag.

And it is no trivial bag. In fact, it's bag worth about $200,000. That's the figure some say a couple retiring today at age 65 without insurance will need to pay for medical expenses.                                                                    


The New York Times - February 3, 2004 - Excerpts

Companies Limit Health Coverage of Many Retirees

Employers have unleashed a new wave of cutbacks in company-paid health benefits for retirees, with a growing number of companies saying that retirees can retain coverage only if they are willing to bear the full cost themselves.

Scores of companies in the last two years, including the telecommunications equipment giants Lucent Technologies and Alcatel and a big electric utility, TXU, have ended medical benefits for some or all of their retirees and instead offered to let them buy coverage through a group plan. This coverage is often more expensive than many retirees can afford.

Experts expect that the trend, driven by the fast-rising cost of health care, will continue, despite the billions of dollars that the government will distribute to companies that maintain retiree health coverage when the new Medicare drug benefit begins in two years. In contrast to pension financing, companies are not obligated to set aside funds to pay for retirees' health benefits, and the health plans can usually be changed or terminated at the company's choosing, with no appeal available to the retirees.

The costs can be a shock. According to surveys by benefits consultants, companies that offer health benefits to retirees typically have subsidized about 60 percent of the premium. Losing that support all at once can mean hundreds of dollars a month in unexpected costs.

Moreover, in dropping their subsidies, many companies push retirees into insurance pools that are separate from those of younger, healthier workers, executives said. That lowers the company's costs for insuring its current workers, while raising the premiums charged to retirees even further.

James Norby, president of the National Retiree Legislative Network, an advocacy group that is urging Congress to strengthen legal protections for retired workers, said companies that charged for formerly covered benefits had found "a clever way of getting out of the contract they made to people who had been retired for 15 or 20 years."

Last year, only 36 percent of companies with 500 or more workers still offered a retiree medical plan to at least some retirees not yet eligible for Medicare, down from 50 percent in 1993, according to a recent survey by Mercer Human Resource Consulting.

Last month, a study for the Kaiser Family Foundation by Hewitt Associates found that among employers that have maintained retiree coverage, about 15 percent have required at least some retirees to assume the full cost of their insurance in the last two years. Another 31 percent said they would probably adopt these so-called access-only health plans within the next three years.

According to the Kaiser-Hewitt survey, the average monthly health insurance premium for an employee who took early retirement last year was $845, including coverage for the spouse. So early retirees who lost the typical 60 percent subsidy would face added costs of more than $500 a month.

The impact would be less severe for people 65 or older who are covered by Medicare; retiree benefits for them, when they are offered, are usually the equivalent to so-called Medigap supplements to Medicare. In the Kaiser-Hewitt survey, the average premium for employees who retired at 65 last year was $419, including coverage for a spouse.

Lucent Technologies, whose business went into a free fall with the popping of the telecommunications bubble, adopted an access-only health plan this year, but only for the spouses of 9,000 management retirees who had retired since March 1990 with annual pay of $87,000 or more.


ABC Evening News - February 5, 2004 - Excerpts

"Broken Promises" To Retirees

The segment opened with Mr. Jennings stating: " We are going to take a look tonight at some Americans who retired believing that their retirement health benefits would carry them through their later years.  In 1993, 46 percent of large U.S. companies offered health care coverage to their retirees.  By last year only 28 percent did so.  And, most of the companies that still provide benefits are charging employees increasingly more.  A lot of retired employees are bitter, and angry, and frightened."

Following Mr. Jennings introduction, Dean Reynolds, ABC News Chicago reporter, profiled the increased costs of health care coverage to two retirees-one from Lucent Technologies and the other from Johns-Manville.

Narrator's voice over video of Mr. and Mrs. Bob Jerich in their home:  "Sixty-one-year-old Bob Jerich once thought he was set for life.  Even though his wife has Parkinson's disease, he felt secure enough to take early retirement from Lucent Technologies back in 2001, confident that his company's health insurance would be there to protect them financially.  Big mistake!"

Interview with Bob Jerich:  "I would have never retired if I had known what I know today."

Narrator: "Because today he picks up the bill for most of his health insurance instead of his old employer."

Continuing Bob Jerich's Interview:  "Two and a half years ago, my monthly medical deduction was $32.  Today, it is $577.  And God knows were it is going."

Narrator:  "And Lucent declined to answer that question, but said in the statement 'we simply do not have the money to continue our historic levels of subsidies'.  In fact, of 408 large companies surveyed last year by the Kaiser Family Foundation, 71 percent said they have forced retirees to pay a bigger share of insurance premiums."

David Messick, a Northwestern University professor, stated in a sound bite: "To say that the economic situation is a rough one is not an excuse for (companies) lying or breaking promises."

A 67-year-old Johns-Manville retiree who retired in 1988 read from his retirement handbook that his health care plan would be fully paid for by his company.  That has proven to be false.  This year the cost to him personally increased by more than 450 percent.

The story concluded with a voice over by the reporter:  "To some the obvious answer is a government supported plan, but that could be expensive, require new taxes and be politically risky.  And yet politicians searching for solutions may want to keep in mind an important statistic.  The older you get, the more likely you are to vote."


The Chicago Tribune - February 24, 2004 - Excerpts

Retirees losing medical benefits from former employers

Tommy Johnson remembers the day when he opened the letter from his former employer.

"It was a year ago that I got the letter from AT&T," the retired computer engineer recalled. "It was nice. Just before Christmas."

The letter informed Johnson that the company-paid health insurance benefits he and his wife had been guaranteed when he retired after 34 years with the company were being cancelled. The company informed Johnson, then 60, that continued coverage would cost him $411 a month.

"The only choice I've got is to pay the $411, or else there would be no insurance for me and my wife," he said.

Millions of Americans find themselves in the same situation as corporations seek to control costs by ending, or curtailing medical coverage for retirees.  Experts warn that continued increases in health care costs and the looming retirement of Baby Boomers ensures that the problem will grow.


Christian Science Monitor - February 27, 2004 - Excerpts

Baby boomers face retirement squeeze

A number of factors - including a sobered stock market, deficit pressures, and corporate cutbacks - may be putting the retirement security of baby boomers at greater threat than at any time in a quarter century.

This week's provocative call by Federal Reserve chairman Alan Greenspan to scale back future Social Security benefits to help cover a growing federal budget deficit, is just part of the concern.

Evidence is mounting that the other two pillars of retirement security - private-sector pensions and personal savings - are no longer adequate to ensure that most Americans will have enough to live on when then retire.

At the problem's root is a long-term shift that politicians are reluctant to face: With Americans living longer, the senior population is growing faster than the number of young workers to cover their needs. Benefit levels are getting harder to sustain.

It's a calculus that is as challenging for corporate pension plans as it is for Medicare and Social Security programs.

The defined retirement benefit, the pension that was once a standard perk in a big firm, is a rapidly disappearing option for many Americans. The number of Fortune 100 companies offering a fixed-benefit pension has dropped from 68 percent in 1998 to 50 percent in 2002, according to Watson Wyatt Worldwide. And federal data show a steady fall in private-sector workers who have pensions: from 38 percent in 1980 to 21 percent in 1998.


The Atlanta Journal-Constitution - February 28, 2004 - Excerpts

Retirees worried over pension uncertainties

The pension crisis in America is enough to give retirees gray hair.

While Congress struggles to complete a temporary fix, Walter Ehmer and Jim Gray sweat about getting all the retirement benefits they were promised.

"Companies are trying to get out of their responsibilities," said Ehmer, pointing to employer-supported legislation that would reduce pension funding.

Ehmer, retired from Lucent Technologies, and Gray, a former Delta pilot, represent the human side of a debate that largely has focused on the big picture: a troubled pension system and financially strapped employers.

"In theory, the money to fund your pension should already be set aside," said Rebecca McEnally, vice president of global advocacy at the Association for Investment Management and Research in Charlottesville, Va. "As a practical matter, it may or may not be set aside."


Reuters - February 29, 2004 - Excerpts

Lifting the Lid: the Buck Stops with Pension Plan Trustees

Largely ignored in the probes of improper trading in mutual funds have been the trustees of pension plans. But that may soon change.

Massachusetts' top securities regulator reminded trustees this week that they, too, have fiduciary duties and must ensure the investments they oversee are protected.  William Galvin, the Massachusetts secretary of the Commonwealth, told Reuters on Tuesday that those who make decisions for other employees or workers could come under scrutiny -- the same as the companies that manage mutual funds.

Galvin's comments are a timely reminder for pension plan trustees -- who have received little guidance from the Labor Department, which regulates pensions.


Wall Street Journal - March 16, 2004 - Excerpts

How Cuts in Retiree Benefits Fatten Companies' Bottom Lines

Trimming a Health-Care Plan Creates Accounting Gains,

Under Some Arcane Rules A Shield Against Rising Costs

The loud message comes from one company after another: Surging health-care costs for retired workers are creating a giant burden. So companies have been cutting health benefits for their retirees or requiring them to contribute more of the cost.

Time for a reality check: In fact, no matter how high health-care costs go, well over half of large American corporations face only limited impact from the increases when it comes to their retirees. They have established ceilings on how much they will ever spend per retiree for health care. If health costs go above the caps, it's the retiree, not the company, who's responsible.

Yet numerous companies are cutting retirees' health benefits anyway. One possible factor: When companies cut these benefits, they create instant income. This isn't just the savings that come from not spending as much. Rather, thanks to complex accounting rules, the very act of cutting retirees' future health-care benefits lets companies reduce a liability and generate an immediate accounting gain.

In some cases it flows straight to the bottom line. More often it sits on the books like a cookie jar, from which a company takes a piece each year that helps it meet its earnings targets.

Big companies began in the early 1990s to set ceilings on how much they would ever spend for retiree health care, regardless of what happened to medical costs in general.

The fate of retirees can be very different. When Robert Eggleston retired from International Business Machines Corp. 12 years ago, he was paying $40 a month toward health-care premiums for himself and his wife, LaRue, with IBM paying the rest. In 1993, IBM set ceilings on its own health-care spending for retirees.

Mr. Eggleston, 66 years old, has seen his premiums jump more to $365 a month for the couple. Deductibles and copayments for drugs and doctor visits added $663 a month last year. "It just eats up all the pension," which is $850 a month, Mrs. Eggleston says. Her husband has brain cancer. Though he gets free supplies of a tumor-fighting drug through a program for low-income families, he has cashed in his 401(k) account, and he and LaRue have taken out a second mortgage on their Lake Dallas, Texas, home.

For many big U.S. companies, cutting benefits doesn't merely relieve them of future spending. More important, though less visible, is the instant income the cuts can create. It's all because of an accounting rule adopted nearly 14 years ago.

Just setting a spending cap typically brings an accounting gain, because it reduces the amount the company expects to pay out over time for the benefits. A company that goes further and cuts the benefit structure reaps more paper gains. It may sound strange that a company can get income from cutting benefits it hasn't paid and may never pay, but that's how it works.

But it's still a better measure of the burden of health care than one other number that companies report: their "expense" for retirees' health care. This is essentially an accounting measure of how much a benefit plan pushes corporate income up or down, driven largely by changes in liability.

When employers cap or cut retiree medical programs, the companies don't benefit just by spending less and reaping accounting gains. They also can benefit from a spiral of dropouts.

As retirees see their out-of-pocket costs rising, some of the healthier retirees quit the company program. Their good health lets them buy cheaper coverage elsewhere. But their departures concentrate the remaining pool with sicker people, costs go up, more dropouts ensue, and the pool gets more concentrated again, in what the industry sometimes calls a death spiral.

Each dropout reduces a company's immediate outlays, since it no longer has to pay even a capped benefit for that person. Dropouts also generate accounting gains for the company, since the concern gets to reverse the liability it had booked for covering those retirees for life.

A company in this situation -- with its own expenses capped -- has little incentive to negotiate the lowest possible prices with medical providers. In fact, it has an incentive not to: Rising expenses not only won't hurt the company but will tend to drive more retirees from the program.

Medicare's new prescription-drug benefit is giving companies a whole new source of accounting-generated income that boosts their earnings.

And some employers may get federal subsidies even after transferring costs to their retirees.

Congress was worried that if Medicare paid for prescription drugs, companies would cut retiree health-care benefits even faster than they already were. So when it passed a Medicare drug benefit last year, Congress added subsidies for companies that retain retiree drug coverage. The U.S. will reimburse employers for 28% of the cost of retiree prescription-drug spending over $250, up to a subsidy of $1,330 per retiree per year.

This means companies can reduce the liability they're carrying on their books for drug coverage. They won't get the subsidy until 2006. But accounting rules let them estimate how big a subsidy they'll get over the lives of current and future retirees and deduct this figure from their liability right now -- and start dropping immediate accounting gains to their bottom lines.

General Motors Corp. estimates the Medicare prescription-drug plan will cut $4 billion from its liability for retiree health care. Other companies' estimated cuts include $1.3 billion at Verizon Communications Inc., $572 million at BellSouth Corp., $415 million at AMR Corp., $450 million at U.S. Steel Corp., and $280 million at UAL. All of these will boost the companies' income.

The new Medicare law means some companies can get federal subsidies (and thus fresh accounting gains and earnings) even if they shift part of the cost of their retiree drug coverage to the retirees themselves. That's because the way the law is written, the subsidy is based on the whole cost of a company's retiree drug program -- including the part retirees have to pay for.


USA Today - March 17, 2004 - Excerpts

Health insurance premiums crash down on middle class

Nancy Sherman Soleimani fears dropping her $1,200-a-month health insurance policy almost as much as she worries about how she'll continue to pay for it.

Don Clingerman says his 62-year-old mother's retiree health coverage is so expensive - $7,900 a year - that he may recommend she drop it, gambling that she'll stay well until she's 65 and can get Medicare.

Hank Sturma, 60, says he's been without a job - and without insurance - for about a year. Sturma says he can't afford the $325 a month it would cost to add him to the policy his wife has through her job at a nursing home.

Rising health care costs are increasingly pressuring the middle class, adding a large and politically influential group to the category of those who fear they may soon have to do without.

There's little hope for relief in the short term. Health spending is expected to rise well above inflation for years to come. Employers are increasingly passing on the additional costs to their insured workers, causing some workers to opt out, saying they can't afford it. And, at some workplaces, employers are dropping coverage altogether.

Today's average premium for a family insurance policy - $9,086 a year- already represents 21% of the national median household income of $42,409.  If insurance premiums continue to rise about 10% a year, today's average premium could double in just over seven years. Wages, however, are only expected to grow at about 3% a year.

Some analysts say the rising cost of premiums and increasing load of deductibles and other fees will lead more of the currently insured to drop their coverage.  Already, 19% of those whose household income is $25,000 to $50,000 are among the nation's 43 million uninsured. The percentage is even higher among those making less than that: 23%. Even those with household incomes exceeding $75,000 saw a rise in the percent uninsured in the last Census Bureau survey.


The New York Times - March 21, 2004 - Excerpts

Concerns Raised Over Consultants to Pension Funds

A small but growing part of the $2 trillion in state and local pension funds is being steered into high-risk investments by pension consultants and others who often have business dealings with the very money managers they recommend. After making such investments, a few of these pension funds have come up short, forcing the governments to draw on tax dollars.

The Securities and Exchange Commission is so concerned that it has begun an inquiry into the practices of pension consultants, who serve as gatekeepers for thousands of money managers.

The regulators will find not just financial consultants but a web of intermediaries - marketing agents, lobbyists, brokers and world leaders - between pension funds and the investments they choose.


Reuters - March 22, 2004 - Excerpts

Pensions Take More Risks as Shortfalls Grow-Survey

U.S. pension plans are seeking better returns by slightly increasing their investment risk as funding shortfalls in a growing number of plans raise concerns.

For pension funds, the stock market rebound has been largely offset by consistently low interest rates and unfavorable demographics, the report said. 

When people live longer and interest rates remain low, pension funds' future obligations increase.

About 16 percent of corporate pension plans were less than 75 percent funded and 45 percent were less than 95 percent funded at the beginning of last year.

Corporate pension funding ratios fell from 121 percent in 1999 to 88 percent at the end of 2002, according to the report. "The average plan was deep in the hole at the end of 2002, and the hole is getting deeper," said Dev Clifford, a Greenwich Associates consultant.


Reuters - May 12, 2004 - Excerpts

Most corporate pensions remain underfunded - survey

Only 19 percent of the 331 companies in the Standard & Poor's 500 index that provide defined benefit pension plans had pension assets that matched or exceeded liabilities in 2003.

Defined benefit pension assets for the S&P 500companies surveyed rose $139 billion to $1.03 trillion, while liabilities increased $85 billion to $1.15 trillion.

Wilshire Research said although the median "expected return on plan assets" assumption has fallen over the past three years -- to 8.50 percent in 2003 from 9.50 percent in 2000 -- "many pension accounting critics believe that this assumption is still too high."  Wilshire's own long-term forecast for the return on corporate pension assets is about 7.0 percent.


Knight Ridder - May 30, 2004 - Excerpts

Company-paid health insurance for retirees now rare

Ed Stish is not living the carefree life he envisioned when he retired from a taconite mine in Keewatin, Minn., three years ago. He has no time for lounging in a La-Z-Boy, golfing or fishing for pleasure.

Instead, Stish rises early and sets about growing vegetables, trapping beaver for pelts and harvesting wild rice on a lake near his home in Bovey. His wife, Sue, sells the bounty at farmers' markets four days a week.

They do this to survive. Just a few months after he retired at age 50 from National Steel Corp., his employer of 30 years went bankrupt, taking with it longtime promises to provide a livable pension and cheap health insurance for life.

Even though the U.S. Pension Benefit Guaranty Corp. stepped in to protect workers' pensions, Stish's monthly payment was cut almost in half to $1,350. And the buyer of the mine, U.S. Steel, never made good on the old promise to provide retiree health insurance.

That left Stish in the same predicament as countless retirees caught in an unaffordable health insurance trap they never expected. Company-paid health insurance for retirees is becoming extinct as companies try to slash costs and increase profits.

Although federal law requires companies to deliver the pensions they promised, no such legal obligation exists for health insurance.

Eleven years ago, 46 percent of large U.S. companies helped retirees with health insurance, but now just 28 percent continue to do so, says researcher Paul Fronstin of the Employee Benefits Research Institute. Among all U.S. companies, 11 percent provide retirees with health insurance.

In the past few years, retirees such as Stish were taken by surprise when an employer went broke or was acquired by another company that didn't want to continue their health benefits. Others have lost insurance because former employers wanted to avoid spiraling health insurance costs, or they could bolster corporate profits quickly through an accounting maneuver that can turn disbanded insurance liabilities into instant income.

Last year, 10 percent of companies that gave retirees health benefits eliminated them completely, and 71 percent made retirees pay a greater portion of health coverage, according to research by the Kaiser Foundation and Hewitt Associates.

Cutting retiree benefits is considered the path of least resistance. The special accounting attached to cuts in health benefits works almost magically to prop up corporate profits.

"Companies attack the segment of their stakeholders that have no defense," says Jim Norby of the National Retirees Legislative Network.

The network has asked Congress to pass laws that would mandate employers to maintain their commitments to retirees, but Norby says there's not much interest.

Meanwhile, as companies slash benefits, retirees are left in a bind. With poor job prospects and insurance costs high for older people, many retirees can't afford thousands of dollars in unexpected expenses.

Typically, when workers consider retirement, they check on their company benefits and add up monthly living expenses such as heat and property taxes. If pensions, savings and Social Security look like they will cover all the costs, they may decide it's safe to retire.

But that can be a serious mistake if unanticipated health insurance costs pop up after retirement. Early retirees, those younger than 65, may have to spend $1,000 a month for insurance. People eligible for the federal Medicare program may have to spend about $250 a month on supplemental insurance because Medicare only covers about half of the costs.

A person who retired in 2003 with employer health benefits will need between $37,000 and $750,000 in savings to pay for his supplement to Medicare, according to the Employee Benefits Research Institute. A person without any help from an employer will need $47,000 to about $1.5 million.


Chicago Sun-Times - May 30, 2004 - Excerpts

Companies axing retirees' health benefits

Fred Bena is reluctantly learning about Medicare prescription drug insurance, figuring that his former employer's retiree health benefits won't last and he'll be forced into a costlier Medicare plan.

The retired airline worker is among the 11 million to 12 million Americans 65 and older who receive drug coverage from their former employers.

The number of companies offering health benefits to retirees has been declining for at least 15 years. And no one knows whether the Medicare drug insurance that begins in 2006 will accelerate that trend despite a provision in the new law designed to entice companies to maintain coverage.

''I can foresee the company saying, 'This is costing us too much money, so we're bailing out,'" said Bena, 77. ''That's my big fear.''

With health costs rising fast, corporations have tried to contain their cost. Retiree benefits have been a frequent target.

In 1988, 66 percent of firms employing 200 or more workers offered health coverage to retirees. By 2003, the number had fallen to 38 percent, according to the Kaiser Family Foundation.

Lawmakers and representatives of civic groups report that retirees with health benefits are nervous that the new Medicare law will cause more companies to abandon retiree drug coverage, removing the protective barrier between them and fast-rising drug prices.


The New York Times - June 2, 2004 - Excerpts

Actuaries Under Scrutiny 0n Pension Fund Pacts

The Department of Justice has asked several big actuarial firms for information about the terms of their client agreements, in what appears to be an effort to learn whether certain provisions violate antitrust laws.

Officials of the actuarial firms said they had received "civil investigative demands," or written requests for information that fall short of subpoenas, from the department's antitrust division.  The letters seek documents and other information related to the firms' decisions, about two years ago, to ask their pension fund clients to sign clauses limiting their ability to sue the firms.

Almost all American pension funds, public and private, began to have serious financial difficulties in 2001. Much of the trouble was caused by unusually adverse financial market conditions, which persisted for several years. But in some cases, retirees or others connected with the pension funds have contended that the actuaries who advised the funds added to the trouble, by making errors in judgment or in calculations.


The New York Times - June 13, 2004 - Excerpts

Healthier and Wiser? Sure, but Not Wealthier

By many measures, today's older workers appear better equipped for retirement than any previous generation. Their homes are worth more than their parents' homes were. Their bank accounts are fatter. And study after study suggests that typical late-middle-age employees have accumulated more wealth than their counterparts did a quarter-century ago.

But virtually all of these studies have a flaw, a crucial asset that is left out of the equation. Add it back in, and the rosy picture suddenly darkens.

That asset is the traditional pension, an employee benefit that was widely available until the early 1980's but has been vanishing from the American workplace ever since. More than two-thirds of older households - those headed by people 47 to 64 - had someone earning a pension in 1983. By 2001, fewer than half did. The demise of the old-fashioned pension has been much discussed, but the effect on family finances has not. That is because the impact has been hard to measure.

New evidence suggests, though, that the waning of the pension has, imperceptibly but surely, stripped older workers of an immense store of wealth - much more than they probably guessed, if they thought about it at all.

In 1985, about 115,000 American companies had traditional pension plans. As of last year, only about 31,000 did. Of those, many are thought to have frozen the benefits, pension specialists say, so that additional years of service no longer build a bigger pension. Others have closed their plans to new employees, or reduced their benefits formulas.


Associated Press - June 18, 2004 - Excerpts

1,050 pension plans report shortfalls of $278.6 billion

More than 1,000 underfunded pension plans reported a total shortfall of $278.6 billion in 2003, a 9 percent drop from the previous year, based on the latest government filings.

Overall, 1,050 underfunded plans reported $641.8 billion in assets to cover $920.3 billion in retirement benefits and other liabilities, said the Pension Benefit Guaranty Corp.

The data are being released earlier than ever before as part of an overall agency strategy to publicize the funding crisis building in the nation's private-pension system. The PBGC also wants changes in laws to let workers and retirees know more about the state of their plans' finances.


Associated Press - June 25, 2004 - Excerpts

Audit review on Big Four cites significant problems

Limited inspections of the Big Four accounting firms uncovered significant problems in their audits of companies' books.

William J. McDonough, chairman of the independent board created to shore up investor confidence, warned auditors against the sort of short cuts or bending to pressure to please corporate clients that fueled the accounting scandals of 2002.

In testimony at a House subcommittee hearing yesterday, McDonough said the four firms - Ernst & Young, PricewaterhouseCoopers, KPMG and Deloitte & Touche - agreed to the voluntary limited inspections, which used as a sample their auditing work for several "high-risk" client companies with complex finances.

In the inspections, the oversight board "identified significant audit and accounting issues," McDonough said. "There's room for improvement."  The board raised its concerns about quality control in auditing to the firms, "and we will continue to look hard at whether the firms' conduct mirrors their words," he said.                      


REUTERS - June 28, 2004 - Excerpts 

Fraud chance higher at less independent US boards

The more independent company boards and audit and compensation committees are, the less likely companies are to commit fraud, according to a survey released on Monday.

The study, published in this month's issue of Financial Analysts Journal, sampled 133 companies charged with fraud between 1978 and 2001 and compared them with companies in similar industries and of similar size.  The researchers found that companies that committed fraud had a fewer outside directors. They also discovered that fraud was more likely when directors had personal or business ties with a company.

The independence of U.S. corporate boards became an issue two years ago after a number of financial scandals cost investors billions of dollars.


The New Jersey Star-Ledger - July 2, 2004 - Excerpts  

Lucent and union paint bleak picture on pact talks

Retiree health-care coverage is one problem area

Lucent Technologies was so eager to wrap up a new labor pact this summer that it began negotiating with union officials months earlier than expected.

But after two weeks of talks, the two sides have made such little progress, they may break off bargaining efforts (the talks did fail) until October, company and union officials say. The current labor contract runs out on Halloween.

A major sticking point is retiree health-care benefits, an increasing burden for Lucent. The Murray Hill-based telecommunications gear company is looking to eliminate dental coverage for retired union workers within four years, and to sharply increase their out- of-pocket expenses for other care, according to the Communications Workers of America, the company's main union.

Lucent expects to pay $240 million out of operating expenses this year for management retiree health-care costs, a number expected to rise to $300 million for the next two years.

The crunch is expected to get much worse in 2007, when a fund the company set aside to take care of similar costs for its 77,000 union- represented retirees is expected to run out. During Lucent's previous round of labor negotiations last year, union officials agreed to some benefit cuts in exchange for a company contribution of $76 million to the fund.


The New York Times - July 2, 2004 - Excerpts

United's Pensions on Increasingly Shaky Ground

As United Airlines prepares to ask workers for a new round of cutbacks, its pension plans look increasingly vulnerable. The airline has four big plans, and shedding any one could lop off more than $1 billion in debt.

Such a drastic step could nudge other airlines to trim their pension plans as well, to keep their labor costs competitive. The long-term prospect could be a series of failed pension plans and lost benefits reminiscent of those in the steel industry, a costly outcome for the government.

As long as this pattern continues, United could conserve more cash in the short term - and make itself more attractive to lenders - by chopping one or more of its skimpier pension plans. It could either freeze the benefits at their current level, or terminate one or more plans outright - a far more drastic step that would require approval by the bankruptcy court.


The Washington Post - July 4, 2004 - Excerpts    

Health Care Costs Darken Sunset Years

Through the first half of the 20th century, a long and comfortable retirement was something few workers experienced. Pensions were not common, Social Security was just getting started, and anyway, most workers died on the job or shortly after retiring.

Then things changed. Social Security flowered. Unions extracted better pensions and other benefits from employers. New federal laws made if difficult for employers to renege on promised benefits and provided government-backed insurance for pensions if employers went broke.

Now, that latter period, especially the years from about 1975 to 2000, is beginning to look like the golden age of retirement in America. In other words, those were the good old days, and if you're still working, there's a good chance you've missed out.

The retirement that looms for many of today's workers is likely to be quite different. While some will still have that magic combination of Social Security, a private pension, a 401(k) and company-sponsored retiree medical insurance, their numbers are shrinking steadily.

The conclusions of experts who study the situation are depressingly uniform. Retiree medical insurance is fading fast. Private pensions -- the kind that provide a lifetime stream of income -- have declined drastically over the past two decades, though they are slipping more slowly now. Social Security's future is problematic, and workers are not doing well in their 401(k)s.

The do-it-yourself trend in retirement -- and the low participation in 401(k) and similar plans -- is the heart of the problem, and has been getting some attention lately. But not widely appreciated is the impact of the disappearance of retiree health insurance.

A new study finds that medical costs can equal 20 percent of pre-retirement income for a worker who retires at 65 and who has no employer health care benefits. In other words, a worker who has savings and pension income adequate to replace all of her pre-retirement income is really 20 percent short of that unless she has some form of employer medical subsidy. And that assumes Medicare eligibility. Workers retiring early without employer medical are projected to have only 59 percent of pre-retirement income left after medical expenses.

The study, by Hewitt Associates, a benefits-consulting firm based in Lincolnshire, Ill., notes that other research indicates that retirees need to have enough resources to replace 85 to 90 percent of their pre-retirement income to maintain their standard of living.

Hewitt found that only workers who have the entire package, including a traditional pension and retiree medical, seem likely to reach that level.


Colorado Springs Gazette – July 4, 2004–Excerpts (reprint from San Antonio Express-News)

Despite outcry, CEOs continue raking in bucks

            Much has been said in the past couple of years, but in effect, little has been done about the increasingly high incomes of the nation’s chief executive officers.

            Last year, the median salary for CEOs of S&P 500 companies was 27.16 percent more than in 2002, when the median salary was 11.48 percent higher than the year before that.

            CEO’s earned a median annual compensation of $2.3 million, and received an additional $2.3 million in restricted stock or realized stock options.

            This year and in years to come, executive compensation specialists believe CEOs will earn even more, despite new Financial Accounting Standards Board regulations encouraging accounting of stock options and enforcement of the Sarbanes-Oxley Act.