Lucent Technologies Inc. (NYSE: LU) will significantly reduce healthcare subsidies for about 50,000 retirees next year.

Starting in 2004, the company will no longer pay subsidies to dependents of former workers who retired on or after March 1, 1990, and whose base salary at retirement was $87,000 or more. Lucent's also jettisoning dental coverage and Medicare Part B expenses (any doctor visits and outpatient medical care not associated with in-patient stays) for all management retirees and their dependents.

In a filing with the U.S. Securities and Exchange Commission (SEC) this week, the company says it hopes to save about $75 million through the cuts. It blames the need for them on rising healthcare costs and the dramatic changes in the telecom market over the last few years. According to the filing, Lucent must struggle to support its many retirees, the majority of which never even worked for Lucent, but were part of AT&T Corp. (NYSE: T) and, in turn, many other companies acquired by that company prior to its spinoff of Lucent in 1996.

"In 1999 we had about 118,000 U.S. employees supporting 106,000 retirees. Today, we have about 24,000 U.S. employees supporting the healthcare benefits of about 240,000 U.S. retirees and their dependents," the filing states. The company's retiree healthcare costs have increased 85 percent in the last six years to about $850 million, according to the filing: "At the rate healthcare costs are increasing, unless we take action now we could face close to $1 billion in annual retiree healthcare costs in the near future – about 10 percent of our annual revenues and close to half the payroll costs for our entire business."

About 40 percent of affected retirees (roughly 20,000 people) have paid nothing up to now toward ongoing healthcare after they leave the company. The other 60 percent pay between $75 and $190 per month, according to Lucent's filing, and will pay anywhere from $150 to $370 per month next year due to the changes in coverage. Lucent will continue to offer comparable coverage at group rates for healthcare and dental plans.

Lucent will keep looking for ways to pare down coverage "in fiscal 2005 and beyond." It plans to bring up the issue to its unions in negotiations next year.

Lucent spokeswoman Mary Lou Ambrus says despite the changes, Lucent continues to be among just 12 percent of U.S. companies still offering healthcare subsidies to retirees. Further, she points out that discontinuing Medicare Part B coverage won't affect other healthcare plans for which retirees continue to get subsidies.

This is small consolation for members of the Lucent Retirees Organization (LRO). "We're shocked that Lucent is doing this to the retirees," says Ed Beltram, communications director of the organization, who once worked for Lucent PR. The group met with Lucent execs in April and July 2003 to propose ways to compromise on proposed cuts in other areas (see Lucent Retirees Ask Questions). Little came of it, but there appeared to be good will on both sides. Now this. "We were blindsided," Beltram says.

The LRO board will meet today to discuss several options, including legal action, being more visible in the news media, and asking members to petition Congress for new legislation that would prevent such benefit cuts.

"We... are astonished that Lucent seems to be placing the burden of much of its recovery on the backs of retirees," writes LRO president Ken Raschke in a public statement on the group's Website. He says Lucent execs "are continuing to receive millions in salaries, stock options and retention bonuses and are not experiencing the degree of financial pain that they are inflicting on retirees."

Lucent is known for paying its executives well (see Lucent Fat Cats Gorge in 2002 and Post-Bubble Arrogance). Not counting stock option awards, in 2002 the company shelled out roughly $11.7 million in cash to six top executives. This included $4.5 million in a retention bonus to COO Robert Holder, one of the execs paid to stay on through the company's restructuring after the dismissal of CEO Rich McGinn in October 2000. Holder left the company in April 2003 (see Russo Takes Place of Holder).

SEC filings indicate that if CEO Patricia Russo stays with the company and retires at 65, she'll be eligible for $1,167,962 annually in pension benefits.

Lucent's Ambrus says executive compensation has been in line with industry benchmarks. Even if all executive compensation was cut, it wouldn't make a dent in the healthcare subsidies, she contends. And she notes that executives have the same healthcare benefits as other management employees.

— Mary Jander, Senior Editor, Light Reading