By Bruce V. Bigelow
UNION-TRIBUNE STAFF WRITER

February 22, 2002

With a shareholder vote on its $21.9 billion merger just weeks away, the Hewlett-Packard Co. is trying to reassure retirees who fear HP's deal with Compaq has put their medical benefits in jeopardy.

The issue erupted in the past week in a flurry of e-mail exchanges, Internet stock chat postings and telephone calls as some HP retirees scrutinized the language of HP's merger agreement with Compaq.

In response, HP posted a statement to employees on its internal Web site late Wednesday that said: "Coverage under any HP benefit plan is determined by the terms of the plan in question and not by the terms of the merger agreement. HP has not in any way agreed to change HP retiree health benefits in connection with the Compaq merger."

But some experts said retirees have good reason to be worried, regardless of such reassurances.

"It really wouldn't matter here if there's a merger or not," said Michael Gordon, a lawyer in Washington who serves as chairman of the Pension Rights Center. That's because medical benefits, unlike pensions, are not vested.

"The law that regulates pension and health and welfare plans, ERISA, does not really provide much protection for health-care benefits at all," Gordon said. "The courts have held that it's pretty much in the nature of a gratuity. The employer can bestow them or take them away at any time."

Some HP retirees said they began to focus on the issue after reading terms of the HP-Compaq agreement. The terms were included in proxy materials sent to shareholders this month in anticipation of stockholder votes set for March 19 by both HP and Compaq.

In a key section that alarmed HP retirees, the agreement says, "No HP Benefit Plan provides health benefits" to employees after retirement.

Even though HP has been providing health benefits to its retirees, the statement says HP has no obligation to provide such coverage, Gordon said.

"It sounds like a rather cute way, an underhanded way almost, of shunting that responsibility aside and saying they never had that responsibility," Gordon said.

"Your (retired) friends at Hewlett-Packard are staring a potential nightmare in the face," Gordon added. "Especially the ones who are not currently eligible for Medicare."

Similar language elsewhere in the agreement says Compaq's retirees also have no benefit plan for health coverage.

"This was a benefit that HP had made that was sacred," said Marjorie Postel of Poway, a retired school administrator.

Postel's husband, Bill, said he agreed to take early retirement from HP's sprawling Rancho Bernardo plant in 1990 after the company promised to pay the lion's share of his monthly health insurance premiums. The amount paid by HP was based on Postel's time with the company ? 23 years.

"The premiums I pay are $126 a month," said Postel, 70. If HP stops paying, he added, "I don't know what kind of an insurance plan I could get for that."

The rising cost of health insurance, however, has prompted many companies to sharply curtail their benefits to people who no longer contribute to the bottom line.

"There's been a long history of employers offering this kind of benefit and then reneging," said Norman Stein, a University of Alabama law professor who specializes in pension and retirement benefits.

In a 1998 ruling, Stein said, the Sixth Circuit Court of Appeals in Cincinnati ruled that General Motors had the right to change health benefits for 50,000 salaried workers even though they had taken early retirement based on company promises of free lifetime health insurance.

Still, Stein said, "you don't want to be known as an employer whose promise isn't worth anything.

"Even if the courts let them weasel out of their commitment to employees," Stein added, "I think there are some employers who still feel that they've made a commitment to their employees."

HP has long enjoyed such a reputation, but now some retirees say they aren't so sure.

One HP retiree in Northern California, who declined to be identified, said she has received "multiple phone calls and e-mail messages from distressed and concerned retirees.

"Most of our retirees are on fixed incomes," the former employee wrote in an e-mail. "Cancellation of these benefits would cause extreme hardships in many cases."

Rebeca Robboy, a spokeswoman at HP's Palo Alto headquarters, acknowledged that company officials have received numerous queries on the issue, which prompted HP to post the statement on its employee Web site.

Robboy could not say yesterday how many HP retirees there are. HP now has about 86,200 employees, while Compaq has 63,700.

Robboy noted that HP retirees amount to less than 1 percent of the company's shareholders. Still, their votes could be important. In a research note yesterday, Bear Stearns analyst Andy Neff said the March 19 merger vote was "too close to call."

In the statement to employees, Susan Bowick, HP's vice president of human resources, said: "When we have changed benefits programs in the past, we've thoroughly developed alternatives, agreed on the end goal and guiding principles, and communicated decisions well ahead of implementing them, once they have been made.

"This is how we will continue to handle any decisions around all HR programs going forward," Bowick added. "Nobody will have to read about anything in the fine print of a proxy statement. That's not how we do business at HP."