Retirement Benefits and the Lucent/Alcatel Deal

Cite this Article
Bill Sjostrom, Retirement Benefits and the Lucent/Alcatel Deal, Truth on the Market (March 31, 2006),

As a merger between Lucent and Alcatel inches closer to completion, Lucent’s retirees worry about what may happen to their benefits. Billed as a “merger of equals,� concerns about Lucent’s retirement accounts have been a speed bump. While Lucent has nearly a $2.7 billion surplus in its three of its pension plans, it faces a shortfall roughly twice as large in its healthcare plan.

Lucent has been able to use some the surplus to inflate its bottom line in the past few years, however, it also has been paying under funded health care liabilities out of its operating expenses. Last year, Lucent paid $255 million out of its operating expenses to meet its health care obligations. That number is expected to almost double by 2008. According to this MarketWatch article:

Lucent is covering its annual payments toward that deficit out of its operating expenses, because while current law allows the firm to cover some of it with its pension surplus, doing so would have the effect of either raising the company’s future costs or limiting its ability to cut expenses.

To address that issue, Lucent and its union members are asking Congress to make it easier and less expensive to use the pension surplus to help cover the growing deficit for retiree health-care.

Although the law as now written allows companies to shift any surplus above 125% of its expected pension liabilities to cover health care costs, Lucent is asking for changes that would relax those rules.

In an attempt to make up some of the retirement shortfall, Lucent has implemented an aggressive investment strategy which has 61% of the retirement assets invested in stocks and 8% invested in riskier “private equities.� As compared, Alcatel only has only 27% of its investments in stocks and no private equity investment.

Naturally, fear of having to cover the pension obligations has made Alcatel cautious. Perhaps that explains why the deal is billed as a “merger of equals” so that Alcatel can acquire Lucent without paying a premium.

Update:  Paul Secunda at Workplace Prof Blog has the ERISA angle here.