Department of Energy:

Information on Its Management of Costs and Liabilities for Contractors' Pension and Postretirement Benefit Plans

GAO-08-642R: Published: Jun 19, 2008. Publicly Released: Jun 19, 2008.

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For the past 60 years, the Department of Energy (DOE) and its predecessors have carried out their national security, environmental cleanup, and research and development missions through management and operating (M&O) contracts and other site contracts for operations at DOE-owned facilities. DOE currently has 43 such contracts with private companies and nonprofit organizations, including universities. Under the terms of these contracts, DOE reimburses contractors for the costs of providing pension and postretirement benefits--including health care, dental, and life insurance benefit plans--for current and former employees and their beneficiaries. DOE is ultimately responsible for reimbursing its contractors for allowable pension and postretirement benefit plan costs, and records a liability or asset in its financial statements for the funded status--plan obligations less plan assets--of these benefit plans. When these contracts are recompeted or expire, it is DOE's policy to ensure the continuation of these benefits--and the reimbursement of related costs--for incumbent contractor employees and eligible retirees by, for example, transferring benefit plan sponsorship responsibilities to a successor contractor or related company. DOE's contractors sponsor pension plans for their employees, including both traditional pension plans, known as "defined benefit" plans, and 401(k) or similar plans, known as "defined contribution" plans. DOE reimburses contractors on a pay-as-you-go basis for the amount needed to meet the employer's annual share of these costs, and these benefit obligations will represent an ongoing liability to DOE. In 2007, DOE's financial statements reported that contractors contributed $387 million and $334 million to defined benefit pension and postretirement plans, respectively. Since September 1996, DOE Order 350.1, Contractor Human Resource Management Programs, has set forth DOE's policy for oversight of contractors' pension and other benefit plans. In particular, Order 350.1 requires that DOE determine whether contractors' benefits costs are reasonable. In April 2006, in response to its large and growing pension and postretirement liabilities for contractor employee benefits, DOE issued Notice 351.1, Contractor Employee Pension and Medical Benefits Policy. Under Notice 351.1, DOE would have continued to reimburse contractors for the allowable benefit costs of existing "incumbent" employees and eligible retirees, but the Notice would have limited DOE's reimbursement for new "nonincumbent" employees to the costs of "market-based" pension and health benefit plans. The joint explanatory statement that accompanies the Consolidated Appropriations Act, 2008, directed us to assess the adequacy of DOE's analysis of pension and medical liabilities. In response, and in consultation with your staffs, we are providing information on (1) DOE's analysis supporting its approval of the April 2006 policy changes contained in Notice 351.1, (2) DOE's liabilities broken out by contractors' defined benefit pension and postretirement plan components and among its M&O and other site contracts, and (3) DOE's recent actions to manage its future costs and liabilities.

DOE officials told us that the decisions underlying the policy changes in its April 2006 Notice 351.1 were informed over a period of years by the trends in cost reimbursements, budgetary uncertainties, and by consulting actuaries and others, including DOE Inspector General reports and our reports. The documentation DOE provided us demonstrates that it recognized the historical and possible future trend of its liabilities and costs related to contractor benefit plans. However, DOE officials acknowledged that there was no formal compiled record or summary analysis of the documentation and factors considered before Notice 351.1 was issued. We found that the documentation provided to us contained only limited evidence that DOE had considered policy alternatives, the sensitivities of stakeholders to the policy choices reflected in Notice 351.1, or the near- and long-term financial and mission impacts of the changes made. As of September 30, 2007, benefit obligations for DOE contractors' defined benefit pension and postretirement plans were approximately $27.5 billion and $10.5 billion, respectively. With assets of $27.4 billion and $161.6 million, the resulting net funded status (net liability) was $69.5 million and $10.3 billion for the pension and postretirement benefit plans, respectively. The funded status of DOE contractor benefit plans can change from one year to the next as benefits accrue and are paid, and due to other factors. The contractors' methods for funding these benefit costs--generally either by setting aside funds while employees are working (pension) or on a pay-as-you-go basis after employees have retired (postretirement benefits other than pensions)--directly impact the funded status of the plan. Because postretirement benefits are not generally funded in advance of being paid, these benefit obligations will represent an ongoing liability to DOE. From fiscal years 1997 to 2007, the net funded status of contractor postretirement benefits generally declined from an underfunding of $5.0 billion to an underfunding of $10.3 billion. Since 2005, DOE has awarded 14 contracts that contain new provisions designed to limit pension and postretirement benefits for new employees to no more than 105 percent of comparable organizations. While this focus on the benefits of new employees is similar to Notice 351.1, DOE's current policy and practices do not require that contractors offer defined contribution pension plans to new employees in order for contractors to be reimbursed for benefit costs. Rather, DOE requires that new employees receive a total benefits package that does not exceed the 105 percent benchmark. In so doing, DOE continues to follow the Order 350.1 provision that could limit reimbursement if a contractor's total benefit value or cost study score for all benefits exceeds the 105 percent benchmark of the comparison group, but is applying this provision primarily to new employees. Recent contracts awarded by DOE's Office of Science have generally retained a single set of benefit plans for all contractor employees because the benefit value scores for these plans were near the 105 percent benchmark. DOE expects that implementing Order 350.1 in this way will not substantially affect the department's pension and postretirement benefits costs and liabilities for the next 20 to 30 years because the requirements are directed at new employees typically hired at the beginning of their careers. Incumbent employees--those hired before a contract's award and eligible retirees--will continue to receive their existing benefits or a substantial equivalent.

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