The Lucent-Alcatel Merger, Pension Obligations, and ERISA Fiduciary Duties

Bill Sjostrom over at the Truth on the Market blog had an interesting post this past Friday on how the merger between Lucent and Alcatel may impact employees' retirement benefits.

Relying on an article from Market Watch, Bill explains how even though Lucent has had a pension surplus over the last number of years, it has an underfunded health plan. As a result, Lucent has been taking money out of its operating expenses (some $255 million last year) to pay for its health care costs and such costs are due to double in the next year.

With the merger looming with Alcatel, Lucent would rather use its pension surplus to help cover the costs of its underfunded health plan, but current law makes that difficult 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.

In the meantime, Bill points out that, "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."

Although Bill looks at this strategy from a corporate law standpoint as a reason why Alcatel has not paid a premium for merging with Lucent, I wonder whether such an aggressive pension investment strategy on Lucent's part may not run afoul of its fiduciary obligations under ERISA.

Of course, ERISA requires fiduciaries to act in the best interest of participants and beneficiaries of a plan, to act as a prudent fiduciary would under similar circumstances, and to engage in prudent diversification of plan assets. Given the facts as presented by Bill and the Market Watch article, there is some reason to believe that Lucent's action may fail some or all of these standards. More specifically, how can the Lucent retirement plan fiduciaries claim they are acting with an eye single to the interests of participants and beneficiaries of the plan when they are taking action which is meant to deal with a completely different corporate concern, the underfunded health care plan?

If Lucent's aggressive pension investment strategies leads to investment losses, the new Lucent-Alcatel might have additional worries in the form of a class action ERISA breach of fiduciary suit.

PS