The pension funds at DaimlerChrysler Corp. and Lucent Technologies Inc. should escape relatively unscathed from the approximately 42,000 combined layoffs the two companies face.
DaimlerChrysler, in Auburn Hills, Mich., announced Jan. 29 that it would cut 26,000 jobs, or about 20% of the company's work force, over the next three years through a combination of retirements, layoffs and attrition.
Chrysler Group President and Chief Executive Officer Dieter Zetsche said in a statement that the company hopes to achieve a large part of the reductions through special retirement programs. Some 28,600 North American employees are eligible for retirement or special retirement packages that fall within the framework of union contracts.
The retirements could hurt the $21 billion defined benefit pension fund if DaimlerChrysler offers retirees a lump-sum option and has to pay out a huge chunk of money at one time. Some big companies - including US WEST Inc. (now Qwest Communications International Inc.), Unisys Corp. and Southwestern Bell Corp. (now SBC Communications Inc.) - have had to liquidate pension assets to pay benefits when they have offered special retirement incentives to reduce their work forces.
DaimlerChrysler's pension fund, as a matter of policy, does not offer lump-sum retirement options.
Jack Ferry, spokesman for DaimlerChrysler, said the job cuts "will not have significant negative impact on the company's pension fund." He said retirement offers will be sent out Feb. 6; the window for acceptance runs until Feb. 28.
Surplus tops $6 billion
DaimlerChrysler's non-German pension funds had $25.823 billion in assets at the end of 1999 (the most recent data available) and $19.578 billion in projected benefit obligations, for a surplus of more than $6 billion. U.S. funds make up the bulk of the assets.
If DaimlerChrysler offers only an annuity, or monthly pension benefit payout, the pension fund should have no problems meeting the cash-flow demands, consultants said. They also believe the company's pension fund, because of its size and funded status, could effectively manage lump-sum payments too.
Rich Koski, principal at Buck Consultants Inc., New York, said lump-sum payouts can create liquidity problems and force pension funds to liquidate assets.
"A fund of that size is going to be pretty well managed for cash and have alternatives to come up with cash in the short term," said Mr. Koski, adding that it would be a "pretty remote" chance it would have to liquidate assets.
Peter Preovolos, senior benefits consultant at Alpha & Omega Financial Management Inc., La Mesa, Calif., said a pension fund the size of DaimlerChrysler's could annuitize the benefit payments with incoming contributions and cash flow. In the long run, said Mr. Preovolos, the staff reduction might be better for the pension fund because it will reduce liabilities.
Added Brian Ternoey, benefits consultant with consulting firm Curcio Webb, Pennington, N.J.: "It should be something they could budget and plan for without a lot of forced liquidations."
DaimlerChrysler analyst Michael Schroeder of Wasmer, Schroeder & Co. Inc., Naples, Fla., said a factor to consider along with staff reductions and payouts is how the stock and bond markets perform.
For the five years through 1999, pension funds had high investment returns that exceeded actuarial assumptions and improved the funded status of the pension plans, reducing the need to big contributions.
But in 2000, the market took a turn for the worse. If the downturn continues, it might change actuarial assumptions and cause pension funds to increase contributions.
For the year ended Sept. 30, assets in the DaimlerChrysler defined benefit plan increased 6%; a year earlier, they had increased 20.6%, according to Pensions & Investments' survey of the nation's largest pension funds, published last month.
News of the layoffs hasn't affected the stock price of DaimlerChrysler; it has hovered around the $48 per share mark.
Meanwhile, officials at Lucent, Murray Hill, N.J., and analysts agree the company won't have to touch the pension fund's $19 billion surplus to pay retirement benefits to laid-off employees.
In announcing its restructuring plan Jan. 24, the company said it will eliminate 16,000 jobs and cut some product lines. Lucent has struggled of late, posting a $1.02 billion loss for its first fiscal quarter of 2001, ended Dec. 31. Its share price has plummeted 76%, to a closing of $18.55 per share Jan. 31 from a closing high of about $77 Dec. 20, 1999.
At the same time, however, the company's pension plan has been performing well. In its annual report, Lucent reported its employee benefit plan earned $9.8 billion in investment returns in fiscal 2000. Net of benefits paid, that left the plan with assets of $45.3 billion as of Sept. 30, compared with liabilities of $26.1 billion.
Debbie Lewis, a Lucent spokeswoman, could not say whether the company will offer lump-sum payments, nor could she offer an estimate of the total amount to be paid out in early benefits.
Lucent employees eligible for retirement get their benefits in annuity payments, Ms. Lewis said. Employees who retire before meeting the age and length-of-service qualifications can choose a lump sum or annuity payments. Ms. Lewis said she did not expect that Lucent would voluntarily offer lump-sum payments to employees it plans to lay off.
Steven D. Levy, an analyst with Lehman Brothers Holdings Inc., New York, said, "I think their pension benefits and long-term medical benefits are all pretty much preserved. I don't think they're going to have to dig into that to pay for anything else. Those pension benefits are not at risk at all."
Most employees affected by the job cuts will get their pink slips between Feb. 14 and early March.
In 1999, Lucent converted employees hired after Jan. 1, 1999, to a cash balance plan and changed the way it accounts for pension and retiree health-care costs. Both moves can reduce liabilities, thus reducing what Lucent will have to pay laid-off workers.
While the pension fund surplus might be protected, employees who own company stock through Lucent's defined contribution plan haven't been so lucky. A year ago, Lucent's stock was red hot and rolling. Today there's more fizzle than sizzle. Lucent's stock price has fallen nearly 80% from a year ago due to earnings woes.
As of Dec. 31, 1999, Lucent's 401(k) plan held 157.3 million shares of Lucent common stock worth $11.1 billion, or about $70.25 a share, said Ms. Lewis. Since then, the stock has lost about 81% of its value. No information was available on the 401(k)'s company stock position at the end of 2000.