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Defined Benefit Pension Plan — United States
A defined benefit pension plan, the Nortel Networks Retirement Income Plan, is maintained for eligible employees and executives in the
United States. Benefits are paid to plan participants under one of two formulas, depending on elections made by the plan participant: the
Pension Service Plan (or PSP) formula or the Cash Balance Plan formula.
The PSP formula is available for participants who are employees of Nortel Networks Inc. (or NNI) or other Nortel Networks subsidiaries
located in the United States who enrolled in the plan prior to May 1, 2000, and who elected prior to May 1, 2000 to be covered by the PSP
formula. As of May 1, 2000, the PSP formula under the Nortel Networks Retirement Income Plan was closed to new participants. The PSP
formula provides a benefit based on pension credits and average earnings for the highest 1,095 consecutive calendar days of compensation out
of the last 3,650 days prior to retirement or other termination of employment. Pension credits are earned during each year of participation based
on the participant’s age attained in the year and on years of service. Eligible earnings include base salary and, where applicable, incentive
awards or bonuses, if any, paid under the SUCCESS Plan, overtime, off-shift differentials and sales commissions.
A new defined benefit pension formula, the Cash Balance Plan, was established, effective May 1, 2000, based on pay credits and interest
credits. Employees who were participants in the PSP could continue to participate in the PSP, or move to the new Cash Balance Plan, or elect
to opt out of the pension plan. The Cash Balance Plan formula provides a monthly credit equal to 4% of eligible earnings, with interest being
credited monthly based on the month’s starting balance. Eligible earnings include base salary and, where applicable, incentive awards or
bonuses, if any, paid under the SUCCESS Plan, overtime, off-shift differentials and sales commissions earned prior to retirement or other
termination of employment.
The PSP and Cash Balance Plan benefits can be paid in a lump sum or as an actuarially equivalent annuity.
Certain grandfathering rules exist for employees and executives who were participating in the pension plan as at December 31, 1998.
Federal laws place limitations on compensation amounts that may be included under a qualified pension plan ($205,000 in 2004) as well as
limitations on the total benefit that may be paid from such plans. Pension benefits within the limit are funded by a pension trust that is separate
from the general assets of NNI. Pension benefits applicable to compensation that exceeds federal limitations and pension benefits in excess of
the limitations on total benefits are paid from a restoration (excess) plan, and are funded from NNI’s general assets.
Supplementary Executive Retirement Plan
Eligible executives in Canada and the United States also participate in the Supplementary Executive Retirement Plan (or SERP). Effective
January 1, 2000, the SERP was closed to new participants and there are only 19 executives who remain eligible to participate in the SERP.
For Canadian executives participating in the SERP as at December 31, 1998 who elected, effective January 1, 1999, to remain in Part I of
the pension plan, the SERP formula provides a benefit based on years of service and a pension accrual of 1.3 percent of the final average
earnings of the best three consecutive years. An early retirement reduction of seven percent a year prior to age 60 applies in the case of
retirement prior to this age. The maximum total annual retirement benefit cannot exceed 60 percent of an executive’s final average earnings at
retirement. Eligible earnings include base salary plus the incentive award or bonus, if any, paid under the SUCCESS Plan, and commissions,
however a bonus or commissions will not be included in a given year to the extent that it exceeds 60 percent of a participant’s base salary for
that calendar year.
New SERP plan provisions, which became effective January 1, 1999 and are applicable to Part II members participating in the Canadian
plan and to US PSP formula members, provide a benefit based on pension credits and final average earnings for the highest three consecutive
years in the last ten years prior to retirement, to a maximum benefit of 550 percent of final average earnings. Pension credits are earned during
each year of participation based on the participant’s age attained in the year and on years of service. Eligible earnings include base salary plus
the incentive award or bonus, if any, paid under the SUCCESS Plan, and commissions, however a bonus or commissions will not be included
in a given year to the extent that it exceeds 60 percent of a participant’s base salary for that calendar year.
All participating executives at December 31, 1998 have their benefits protected under the pre-1999 grandfathered SERP formula.
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