[A-List] US legitimation crisis: Lucent, pensions

["Michael Keaney" <michael.keaney@xxxxxx>]

Another Cloud on the Horizon for Lucent Retirees
By MARY WILLIAMS WALSH
New York Times, November 20 2002

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.

Further off, some retirees foresee that if Lucent is ultimately forced to
file for bankruptcy protection - a step that Lucent says it will avoid even
though analysts warn of the real possibility - some of them could lose part
of their pensions. Lucent's pension plans, the old-fashioned type that pay a
defined benefit at retirement and are largely insured by the government,
cover more than 275,000 people.

This comes on top of a drastic decline in workers' 401(k) savings plans,
which have lost more than half their value since the end of 1999, largely
because so much was invested in Lucent stock.

Lucent's travails capture an untold story: the misery that corporate
financial distress can wreak on retirees. Lucent's efforts to restore
profitability are touching thousands of older people who do not come to work
anymore, cannot be laid off and will not show up in the unemployment
statistics.

"What can you do?" asked James Fitzgerald, 65, a Lucent retiree who recently
needed eye surgery. His wife, Margaret, has lupus, a chronic disease. Their
medical bills will not stop coming just because their coverage may end, he
said.

"Would it affect me?" he said. "Sure. I'm on Medicare now. They're my
secondary carrier." When asked how, without the Lucent insurance, he would
pay for prescription drugs and other things not covered by Medicare, he
said, "You can always get a job stacking cans at some store."

While the crash of the technology sector has led to a surge of bankruptcies,
few of the failed dot-coms or other new-economy companies have had
traditional pensions. Lucent is something different, a maker of high-tech
gear for the communications industry with roots deep in the old economy and
with many more retirees than current workers.

Lucent is contractually bound to pay each of the 275,000 people covered by
its pension plans, and its work force of 35,000 must generate the cash to
keep the pension trust funded. These circumstances parallel those of the
steel sector, where stripped-down remnants of once-huge work forces now
struggle to sell enough steel to pay the last generation's retirement
benefits.

Lucent says that whatever happens, it will avoid bankruptcy court. It
recently announced plans to lay off more employees, reducing its payroll to
the expected 35,000 by March, from a peak of 153,000 three years ago. Lucent
is also radically pruning nonessential products and business segments, and
says it has enough cash available to meet all its obligations in 2003. The
company says that it has no short-term debt and it projects that it will
finish the year with more than $2 billion in cash.

But analysts view Lucent's turnaround plans with caution, noting that the
markets for the telecommunications equipment it sells are deeply depressed.
"The market expects bankruptcy, with a probability of about 50 percent,"
said Ziki Slav, a bond analyst at Dresdner Kleinwort
Wasserstein-Grantchester.

It would not take a bankruptcy to deprive retirees of their health coverage.
Companies are required to set aside assets to cover pension promises, but
there are no such requirements for retiree health insurance. Companies
simply provide retiree health care on a "pay as you go" basis.

During the recent boom years, the sums were available. Lucent, for one, was
able to use the ample excess in its pension plans to purchase retiree
coverage, even as the company's overall finances sagged. Pension-funding
regulations permit this when plans have at least 125 percent of the assets
they will need to make anticipated pension payments.

Now, though, pension surpluses are shrinking, both at Lucent and at other
companies. With little money in reserve and health care costs rising at the
fastest rate since the early 1990's, dozens of stronger companies, including
Ford and Sears, have trimmed their retiree medical benefits this year.

"The current track is toward crisis and disaster," said Eric Lofgren of
Watson Wyatt's benefits consulting group, who has followed trends in retiree
medical benefits for more than a decade. He said that the full coverage that
companies once offered is disappearing faster than ever now, and with
millions of baby boomers beginning to retire, he predicted "a huge expansion
in the number of uninsured," which would swamp the Medicare program.

Doubts about medical care are particularly disturbing to Lucent's retirees.
Many of them began working for Lucent's corporate predecessors, Western
Electric and AT&T , in an era when telephone service was a regulated
monopoly and the cost of comprehensive employee benefits was built into
state-approved rates. Under that regimen, few gave well-being in old age a
second thought.

"It totally goes against the grain of how I was raised," said Bart
Dellabella, 62, a retired Lucent draftsman who has begun driving a truck
after losing virtually the entire balance of his 401(k) account, which was
stuffed with Lucent stock.

"We were all brought up in an era when it was the world's largest company,"
he said. "It paid dividends all through the Depression. It was the
cornerstone of everybody's retirement plan. Why would I doubt this company?
In my life, I never doubted it."

Mr. Fitzgerald said it was the old phone monopoly's seemingly endless growth
and resources that attracted him to begin working there in 1955.

"My father told me, `You're not well educated, but people will always need
phones,' " he said.

"I loved that company," he said. "That's the sad part about it."

Even deregulation and the breakup of AT&T did not immediately shake workers'
expectations for retirement.

So it came as a jolt this October when Lucent announced that it would reduce
equity by $3 billion because the assets in its pension trusts had declined.

The announcement underlined a problem looming at a number of big companies:
Not only have pension assets fallen during the bear market, but liabilities
have ballooned. Although people are living longer, longevity is not the main
source of the soaring liabilities. Rather, it is today's unusually low
interest rates. (Pension obligations appear significantly larger when
interest rates are low because of the way companies calculate their present
value.)

A Lucent spokeswoman, Mary Lou Ambrus, said the $3 billion write-down was
needed to comply with an accounting rule that requires companies to measure
their pension trusts at the end of each fiscal year - Sept. 30 for Lucent -
and address any deficit. She said the charge did not involve any cash
payments and was no indication that Lucent was running short on funds.

At the end of the calendar year, Lucent will have to make a separate pension
calculation, using a different methodology. If that one should reveal a
large deficit, Lucent would have to make a cash contribution to its pension
trusts. Ms. Ambrus said Lucent did not anticipate any such deficit or cash
call.

Because there are several ways to measure pension assets and liabilities -
each used by accountants for different purposes - it is possible for one
method to show a surplus while another shows a deficit.

Retirees unschooled in the arcana of pension accounting are understandably
confused. To them, the sheer size of Lucent's charge - $3 billion - is
ominous, and they cannot shake the fear that the decline in pension assets
signals the demise of their health insurance.

"I see them as going hand in glove," Mr. Dellabella said. "If I lose my
medical coverage, I'd have to go out and buy insurance. That's just like
taking a cut in the pension."

Lucent retirees estimated that if they had to pay for comparable health
coverage, they would have to spend from $300 a month for individual coverage
to $800 a month for a family. They based these estimates on what Lucent has
told them it has been paying for their coverage.

Last month, Lucent retirees received a letter saying that in December Lucent
would withdraw $365 million from their pension plan to pay for their health
coverage. The letter said the transfer would cover benefits through Sept.
30, 2003.

Fine, the retirees said, but what then?

Ms. Ambrus said Lucent kept a separate trust for retiree health benefits,
which had assets of $4.5 billion as of September 2001.

"Lucent will continue to pay these benefits out of this trust, even at times
when the pension plan may be underfunded," she said.

Even after all that has happened at Lucent, its retirees have assumed until
now that their pensions were inviolate. Unlike 401(k) plans, traditional
company pensions are guaranteed by the federal government. If a company's
plan goes insolvent, the government will step in and take over the payments.

That guarantee is still in place, to be sure. But the government limits what
it will pay retirees in such cases, according to a schedule based on each
person's age and stipend. A pensioner who is 65 or older when the government
steps in can receive up to $42,954 a year. But a worker who is 55 would get
no more than $19,329 a year upon retirement, and the maximum for
43-year-olds is $9,879.

The size of Lucent's pension payments varies widely, depending on each
person's seniority and the type of work done. One retired engineer in his
early 50's said people like him could expect pensions of about $30,000 a
year - substantially more than the government would cover.

The government also reduces pensions in cases where a company has sweetened
its plan less than five years before going bankrupt, and in certain other
cases.

At companies with skimpy benefits, most pensioners fall safely within the
federal limits. But retirees of a company like Lucent, with its history of
substantial benefits, are more likely to face payment reductions.

Ms. Ambrus said Lucent had no data on how many of its pensioners might be
affected by the federal limits because the government becomes involved only
when a pension plan fails - usually during bankruptcy proceedings - and
Lucent does not anticipate that.

Mr. Fitzgerald said he wanted to believe that but somehow could not.

"Will we know when they're down so low that we're in trouble?" he wondered.
"I don't know. I think a lot of people are going to wake up some morning and
have a real surprise."