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ERIE - LACKAWANNA MERGER STUDY
Pensions, Group Insurance, Medical Protection and Stock Options
Study XVIII
Both the Erie and the Lackawanna has its own Pension, Group insurance and Medical Protection plan, while only the Lackawanna has a Stock Option plan. The purpose of this study was to analyze these plans and determine the types of plans that would probably be adopted by the merged company together with the estimated,change in cost which would result.
Pensions
The Erie has a single funded plan covering officers, excepted employees and non-excepted employees, while the Lackawanna has had two separate plans: funded for officers and excepted employees and unfunded for non-excepted employees.
We understand the two companies have agreed to extend the Erie plan to Lackawanna employees presently covered by the Lackawanna funded plan. The Lackawanna'a unfunded plan was canceled as of June 30, 1959, because of the Company's financial condition and the additional financial burden imposed by the recent amendment to the Railroad Retirement Act. It would seen probable that the Erie plan would after merger also extend to all employees of the merged company in categories similar to those now covered by the Erie plan. As to present Lackawanna employees, this would include most, if not all, of the employees formerly covered by the unfunded plan, and some not covered by either plan.
We have examined the reports made to both companies by their actuaries
with respect to the funded plans for the years 1956 and 1958. There are some
slight differences in the actuarial methods employed and assumptions made but
we do not regard these as material:
As a result of these figures plus the minor differences in actuarial practice, the Lackawanna payments per employee in 1958 were approximately $220 and Erie payments were approximately $50.
In calculating the result of changing to the Erie pension plan, the
following assumptions have been made:
Based upon these assumptions, the net result of applying the Erie plan to Lackawanna employees will be approximately as follows: 1956 1958 Decreased cost of applying the plan to Lackawanna employees presently covered. $57,334 G $29,794 G Increased cost of applying Erie plan to Lackawanna employees not presently covered. 50,700 L 272 L ----------------------- Net result of applying Erie plan to the Lackawanna employees. $ 6,634 G $13,522 G
Group Insurance
The Erie and Lackawanna plans are contributory and apply to specified classes of non-excepted employees as well as to officers and excepted employees, with the Lackawanna plan applying to a broader group of employees than the Erie. It is believed that the merged company would have a plan with employee coverage similar to that offered by the Lackawanna but with the addition of accidental death and dismemberment provisions.
The cost of providing the broader Lackawanna coverage to nonexcepted employees was determined by applying the Lackawanna cost per man covered in each class to the number of Erie employees of such class who would be covered in the future. The extra cost of the accidental death and dismemberment provision was also applied to the Lackawanna personnel now covered.-
Savings were computed by applying the Lackawanna unit costs to the covered proportion of the estimated reduction in the number of officers and employees in the merged company.
Medical Protection
Both companies provide protection for their officers and excepted employees on a similar basis and no increased cost or saving would result from merger.
Stock Options
We assume no stock option plan would be offered to officers and employees of the merged company. Persons with options under the present Lackawanna plan would be protected, but this would not result in any increased cost from the proposed merger.
Summary
As shown in the table below, the estimated net additional annual cost from
the changes described would be $15,908
Pensions
Net saving as outlined above $ 6,634 G
Saving from reduction in number of
eligible officers and employees 21,728 G
Group Insurance
Added cost of providing expanded
Lackawanna plan to employees of
Lackawanna $18,227 L
Erie 64,503 L 82,730 L
Saving from reduction in number of
eligible officers and employees 38,460 G
Net added annual cost $15,908 L
