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

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.