The breakup of AT&T created a pension challenge -- how to divide plan assets among the seven new baby Bells.
Western Electric, the manufacturing arm of American Telephone and Telegraph Co., established one of the first corporate pension plans in 1906. It was noncontributory and offered low benefits.
The entire AT&T system adopted pension plans in 1913, but no funds were accumulated to meet benefit payments to retirees until 1927, when a pension trust was established.
At the end of that year, the Bell System funds, including Western Electric and Bell Laboratories, had assets of $12.1 million.
The funds were overseen by Bankers Trust and until the late 1930s were invested only in AT&T securities. Thereafter they were invested in a broad range of mostly fixed-income securities. Although all of the assets were at Bankers Trust, they were in separate plans, one for each operating division and one each for Western Electric and Bell Labs.
The assets of each plan were invested identically by Bankers Trust, although they could have been invested differently had the operating companies so chosen.By 1949 the Bell System pension funds had grown to just under $1.1 billion; and by 1970 they had grown to $8.1 billion.
Such asset growth could not be ignored, and executives at the Bell System realized the assets could not remain with one institution.
Between 1968 and 1970, the Bell System operating companies were encouraged to hire other institutions to oversee the assets of their specific plans.
In August 1980, the Bell System shook the pension world when it announced it was merging the 33 separate pension plans of its subsidiaries into just two plans, one for salaried employees and one for hourly employees.
The new plans had different benefit structures, with salaried employee pensions being based on career average salary rather than on the average salary of the final five years of employment.
The goal was to save money. The new benefit formulas, and the savings possible on the investment management side, could amount to $400 million a year.
The subsidiaries employed a total of 117 investment management organizations, 70 trustees, 11 investment management consultants and seven master trustees.
In addition, 225 Bell System employees were employed overseeing the funds throughout the company. The subsidiaries spent $35 million in management fees and $16 million in brokerage fees each year.
The combined $28 billion of the new funds made them the largest centrally controlled pool of assets in the country, ahead of Equitable Life Assurance Company of the United States, the largest manager of pension assets at that time with $21.9 billion.
The consolidation was spurred by a new contract with the Communications Workers of America. The contract required that assets backing the pension benefits of hourly workers be split from those backing the benefits of salaried workers.
Money managers working for the Bell System braced themselves for fallout as they expected the company to significantly reduce the number of managers it employed.
For example, all three major index fund managers -- Wells Fargo Investment Advisors, American National Bank & Trust and Batterymarch Financial Management Inc. -- managed index funds for Bell subsidiaries. In addition, AT&T ran an internally managed index fund. Four index funds were not needed.
NO CAUSE FOR FEAR
The managers need not have worried. Less than 18 months later, AT&T entered into a consent decree with the Department of Justice agreeing to break up the company so that it could pursue opportunities in the new world of telecommunications and computers.
At first the details of how this would affect the nation's largest pension fund were skimpy. The company had to submit a plan to the Justice Department on how the 22 operating companies would be grouped regionally. The pension fund issue was not at the top of anyone's agenda in drafting that plan, despite the more than $39 billion in assets.
Eventually, the company and the Justice Department agreed on breaking the Bell System into seven regional operating companies. As a result, the energies of David Feldman, assistant treasurer overseeing the pension fund, and his staff were focused on the breaking up of the fund rather than on trimming managers.
In fact, Mr. Feldman was involved in determining how much of the assets each of the funds of the new operating companies would receive, how the managers and trustees should be allocated, and how illiquid assets such as real estate and oil and gas investments could be handled.
In its divestiture plan, released Dec. 6, 1982, AT&T announced it would divide the money management organizations handling the then $36.5 billion assets among the seven new "baby Bells" as far as possible on the basis of the relationships that had existed at the time the funds were consolidated in 1980.
The plan also called for the seven regional operating companies to get their shares of the assets in two stages. Those with well-developed pension staffs could get 60% of their assets within a few months of the divestiture's effective date. The remainder of the assets would follow within 12 to 18 months, when actuarial calculations were completed. Subsidiaries that did not have well-developed pension staffs by 1984 could leave their assets with AT&T until 1987.
The fund's $3.1 billion in real estate investments were to be handled through real estate group trusts that AT&T was establishing to house the assets, and in which each regional operating company could participate. The regional companies could then withdraw their share of the assets invested in real estate as they desired, subject to the availability of funds.