By: Matt Franz
On January 22, 2013, the GAO issued a report on its review of DoD contractor pension costs. The review was performed in response to an increase in pension costs since the 2008 market downturn and the prospect of recent changes to Cost Accounting Standards (CAS) and Employee Retirement Income Security Act (ERISA) rules regarding the calculation of pension costs potentially resulting in further cost increases.
Given this possibility, the GAO assessed how:
(1) Contractor pension costs are determined
(2) DoD ensures the contractor pension costs it pays are appropriate
(3) DoD contractors’ defined benefit pension plans compare with plans sponsored by similar companies
(4) Pension costs have affected DoD contract costs, and the factors that contributed to these pension costs
(5) Harmonization of CAS with ERISA will affect the amounts DoD will pay in pension costs in coming years
Some of GAO’s key findings included:
- CAS pension costs reported by the 10 largest DoD contractors grew considerably over the last decade, from less than $500 million in 2002 to almost $5 billion in 2011
- Contractor CAS pension costs grew as the market downturn increased unfunded liabilities
- Contractors and DoD officials expect CAS pension costs to increase starting in 2014 due to harmonization
- CAS discount rates used to value liabilities will be tied to the more volatile ERISA-based rates, making it harder to forecast future CAS pension costs and reducing the consistency of cost projections used in contract pricing
- DoD issued limited guidance on projecting ERISA-based discount rates for CAS calculations, but lack of specificity in the guidance can lead to great variation among the rates contractors use
- The discount rates used for settlements were not updated as part of harmonization, meaning liabilities will be calculated differently under CAS and ERISA rules
In response to these findings, GAO issued the following recommendations:
- The Secretary of Defense needs to clarify responsibility for and guidance on assessing pension reasonableness and determining discount rates for pension cost projections
- The CAS board should set a schedule for revising the parts of CAS that address the settlement of plan curtailments
DoD agreed with the recommendations to the Secretary of Defense, and the Office of Management and Budget (OMB) responded that when the CAS board meets it will consider a schedule for the recommended revision.
The full report is 57 pages long and contains the detailed steps that the GAO took to evaluate pension costs. See the detailed report for additional discussion.
The views expressed in this article are those of the authors and do not necessarily reflect the position or policy of Berkeley Research Group, LLC.