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  Another Cloud on the Horizon for Lucent Retirees  
  By Mary Williams Walsh


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."