With three pension funds instead of one, the reorganization of AT&T Corp. could produce new opportunities for some AT&T pension executives, as well as money managers and other service providers.
The reorganization will break up the $40 billion AT&T pension fund - the nation's second largest corporate fund and the fifth largest fund overall.
Although AT&T officials say they don't yet know the size of the three funds, industry sources estimate:
AT&T, the long-distance company, will retain more than $20 billion in pension assets.
The new telephone equipment company will have at least $17 billion in pension assets.
Global Information Systems, the new computer manufacturing company, will have at least $2 billion in pension assets.
Each, of course, will need its own pension staff. David P. Feldman, corporate vice president-investment management, said efforts will be made to select pension executives from the current 40-member AT&T pension staff.
"It is not all clear how that will all sort out, whether we will need more or less people. But the intent will be to use to the extent possible people from inside the business (AT&T). I don't anticipate any surge in hiring," said Mr. Feldman.
Because each pension fund is likely to represent the investment philosophy of each firm, changes in money management structure are likely.
Mr. Feldman doesn't expect wholesale money manager changes "in the short term." He agreed, however, each company would adopt its own investment strategy, which could bring some change in money managers.
Divestiture as a model?
That is what happened at the seven regional Bell operating companies following divestiture - although the economic circumstances and the types of businesses are substantially different this time.
"We (AT&T) will run the process at least through sometime next year. If you chose to use divestiture as a model, there were changes made in the manager lineups over time, but it took several years to settle things out. There may be changes over time .*.*. This is all yet to be worked out," said Mr. Feldman.
"We will go through a workout process that won't be that different from the last time (1984). The first thing we have to figure out is who gets what."
The reorganization of the AT&T pension plan involves many of the same issues the company faced during AT&T's last split.
But unlike the court-ordered divestiture 11 years ago that created seven baby Bells and the same number of new pension plans, AT&T this time might only have to create one new pension plan - for the equipment manufacturing company.
That's because the AT&T plan will continue, albeit on a smaller scale, and the old NCR Corp. pension plan will provide the framework for the GIS plan.
The $1.55 billion pension fund of NCR only recently was integrated into the AT&T plan, even though the company was acquired by AT&T in a hostile takeover in 1991.
Because the NCR plan and money managers are "fairly recent history.....it seems to me that would be a good starting point. My expectation is that NCR will probably go back to the way it was," Mr. Feldman said.
Norman Pao, former assistant treasurer-benefit fund investments at NCR, is now a senior executive in the AT&T human resources department. It is uncertain whether Mr. Pao will join the GIS plan.
Mr. Feldman, who also was involved in the 1984 divestiture, said while the reorganization bears some similarities to the divestiture, there are major differences.
'More complicated' now
"The assets are more complicated now and are less liquid in some sense than they were then," he said. "We have substantially more venture capital and private equity and more real estate."
As of Sept. 30, 1994, AT&T's plan had 62.5% of its assets invested in equities; 20% fixed income; 0.5% cash; 9.5% real estate; and 7.5% in other investments such as venture capital and asset allocation funds and in corporate finance vehicles.
The AT&T plan has approximately $5.1 billion invested in private equity and real estate assets managed internally by the 40-person AT&T pension staff. (The fund also has 54 external asset managers.)
Mr. Feldman stressed executives haven't yet decided how to allocate the illiquid assets to the three pension funds. One possibility, though, is for AT&T to continue to manage the assets for all three firms much as when the Telephone Real Estate Equity Trust was set up to hold all real estate assets owned by the fund before the 1984 breakup.
TREET was managed by AT&T, and paid out all income and proceeds from building sales to the seven operating companies.
"TREET ran very efficiently," he said, and a TREET-like vehicle "is a possibility."
He said venture capital and private placements are "very staff intensive .....and we will take a close look to make sure these investments continue to be managed in the most effective manner."
One private equity asset manager familiar with the AT&T portfolio said he believes AT&T will retain its management.
"The fact that they are splitting these companies off doesn't mean they should or will liquidate these assets. I can't see why they would do that unless they just wanted out of the market; I think it is obvious that they will continue to manage these assets. They know the market and are familiar with the portfolio and will continue to manage it on behalf of the other two companies. It makes sense for them to establish a common trust with AT&T as the manager," he said.
Asset breakup comes later
Before assets are allocated to the three company pension plans, an actuarial review will be conducted, Mr. Feldman said. AT&T executives must allocate the retired lives liabilities of AT&T's 150,000 retirees to each company, and calculate the present value of accrued benefit liabilities for AT&T's 303,000 active employees at the time of the spinoff.
Mr. Feldman said any decisions on handing over the assets will come after executives are selected to handle the financial and pension sides of the equipment and computer companies.
He said there will be no pension staff cuts at AT&T.
"We don't expect to downsize the staff. There is very little difference in staff input between a $25 billion plan and a $40 billion plan. You will need the same skills, and we are already the smallest and most cost-effective large fund management operation in the business," he said.
The current AT&T plan is fully funded, and has a surplus of between $4 billion and $5 billion, he said.
AT&T also has about $15 billion in defined contribution assets, he said. He expects participants' account balances to be transferred with them if they move from AT&T to either of the two other companies.
As if all of the asset allocation decisions weren't enough, AT&T executives also must consider new accounting regulations that could increase pension costs.
William Cleary, national practice leader for retirement plans at Sedgwick Noble Lowndes, New York, said Financial Accounting Standards Board regulations since the 1984 divestiture require, in some cases, immediate recognition of accumulated liabilities.
Mark Maselli, principal at Kwasha Lipton, Fort Lee, N.J., said the allocation of the pension surplus may affect pension expenses of the companies once they become separated. Companies with a surplus usually generate accounting credits used to offset pension expenses, he said.
"When you split up the firm and give the assets to the separated companies, to the extent one or more of the companies ends up with less overfunding than previously, they could possibly see a rise in pension expenses, depending on how the assets are allocated and the accounting process used," he said.
How the money will be split
Under 1984 divestiture, AT&T allocated money managers among the seven new regional Bell operating companies on the basis of business relationships that existed when the pension assets of the subsidiaries were consolidated in 1980.
Many industry experts expect a similar process will be followed this time.
R.W. Wohlert, managing director-finance and assistant treasurer at Southwestern Bell Corp., San Antonio, Texas, said assets were handed over in stages. First, liabilities for active employees and retirees were calculated.
"The allocation of stocks and bonds was fairly easy since some of the money managers were hired just prior to consolidation and some of the managers we hired were there at the breakup. We got some of them back, and they (AT&T) trued up the balance with index managers," said Mr. Wohlert.
Mr. Wohlert said there will be similarities in the AT&T reorganization and the divestiture in 1984.
"Some of the same issues are likely to come up. It worked then and it will work now," he said.
Each RBOC experienced a growth in assets under management during the two years after divestiture and, for all but one, a hefty increase in the number of money managers.
For example, NYNEX Corp., New York, had pension assets of about $3.5 billion as of June 30, 1984, and 12 money managers. Two years later, NYNEX had assets of about $10.1 billion and 27 money managers including its interest in TREET.
Pacific Telesis Group, San Francisco, had $5.3 billion in pension assets in late 1994 and 16 money managers. Two years later, PacTel had $7.6 billion and nearly 30 asset managers.
Only Ameritech Corp., Chicago, decreased its money managers - to 24 from 27 - during the two-year period. Pension assets increased from $6.4 billion to $9.3 billion, but Ameritech had started a program of moving assets from external managers to internal management.