Department of Energy
Progress Made Overseeing the Costs of Contractor Postretirement Benefits, but Additional Actions Could Help Address Challenges Gao ID: GAO-11-378 April 29, 2011The Department of Energy (DOE) relies on contractors to conduct its mission activities. DOE reimburses these contractors for allowable costs, including the costs of providing pension and other postretirement benefits, such as retiree health care plans. Since the economic downturn, DOE has had to devote significantly more funding toward reimbursing these benefit costs, in part because of a decline in interest rates and asset values that has increased contractor pension contributions. In a challenging budgetary environment, further growth in these costs could put pressure on DOE's mission work. GAO was asked to report on (1) the level of control DOE has over contractor pension and other postretirement benefit costs under its current business model and (2) the changes DOE has adopted since the national economic downturn to manage those costs and the extent to which those changes have enhanced its approach. To do so, GAO reviewed relevant laws, regulations, and DOE guidance; analyzed agency financial data; and interviewed officials.
Under its current business model, DOE has limited influence over contractor pension and other postretirement benefit costs. For example, contractors sponsor benefit plans and, as a result, control the types of benefits offered to their employees and the strategies for investing pension plan assets. DOE nevertheless ultimately bears the investment risk incurred by the contractors. Moreover, external factors beyond both DOE's and the contractors' control, such as economic conditions and changes in statutory requirements, can significantly affect benefit costs. For example, the investment performance of plan assets can affect pension contributions, while changes in health care law can affect postretirement benefit payments. Even with these constraints, however, DOE can exercise some influence over contractor pension and other postretirement benefit costs through its oversight efforts, reimbursement policy for contractor benefit costs, and contract requirements. Still, the department will ultimately have to reimburse the cost of contractor pension benefits that have already been accrued. Since the economic downturn deepened in 2008, DOE has taken steps to enhance its management of contractor benefit costs--particularly for contractor pensions--but has not comprehensively reviewed its approach to managing its contractors' other postretirement benefit costs, such as retiree health care coverage. In addition, DOE has not added agencywide information on the costs of its contractors' other postretirement benefits to its annual budget request. As a result, DOE may be delayed in identifying options that might better address the growth of its reimbursement costs and may not provide important information to Congress that could inform annual funding decisions. Moreover, while DOE has, for the most part, continued to use the same reimbursement policy and contract requirements from before the economic downturn, it lacks complete guidance on how program offices should evaluate contractor requests to contribute more than DOE's minimum requirement to their pension plans. DOE is therefore unable to ensure that its offices decide on contractor requests on the basis of consistent criteria reflecting departmentwide goals for managing contractor pension costs. In addition, DOE's existing process for having contractors align their benefit packages with DOE's reimbursement standard is incomplete. Specifically, DOE lacks a comprehensive timetable for when contractors must modify benefit packages whose values exceed DOE's standard. As a result, only 1 of the 16 contractors with benefit packages exceeding DOE's standard for the most recent evaluation period is expected to bring its benefits in line with that standard. Further, DOE guidance allows contracting officers to waive the requirement for contractors to correct benefit packages exceeding DOE's reimbursement standard, but does not detail the criteria contracting officers should follow in making that decision or require a review by DOE headquarters. As a result, some contractors may continue for an undefined period to accrue liabilities and be reimbursed by DOE for benefit packages exceeding the department's reimbursement standard. GAO recommends, among other things, that DOE comprehensively review how it manages contractor postretirement benefit costs and define criteria for evaluating contractor requests to contribute more than the minimum to their pension plans. DOE agreed with three of GAO's recommendations but disagreed with the need to define such criteria.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Mark E. Gaffigan Team: Government Accountability Office: Natural Resources and Environment Phone: (202) 512-3168GAO-11-378, Department of Energy: Progress Made Overseeing the Costs of Contractor Postretirement Benefits, but Additional Actions Could Help Address Challenges
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United States Government Accountability Office:
GAO:
Report to the Ranking Member, Subcommittee on Energy and Water
Development, Committee on Appropriations, U.S. Senate:
April 2011:
Department Of Energy:
Progress Made Overseeing the Costs of Contractor Postretirement
Benefits, but Additional Actions Could Help Address Challenges:
GAO-11-378:
GAO Highlights:
Highlights of GAO-11-378, a report to the Ranking Member, Subcommittee
on Energy and Water Development, Committee on Appropriations, U.S.
Senate.
Why GAO Did This Study:
The Department of Energy (DOE) relies on contractors to conduct its
mission activities. DOE reimburses these contractors for allowable
costs, including the costs of providing pension and other
postretirement benefits, such as retiree health care plans. Since the
economic downturn, DOE has had to devote significantly more funding
toward reimbursing these benefit costs, in part because of a decline
in interest rates and asset values that has increased contractor
pension contributions. In a challenging budgetary environment, further
growth in these costs could put pressure on DOE‘s mission work.
GAO was asked to report on (1) the level of control DOE has over
contractor pension and other postretirement benefit costs under its
current business model and (2) the changes DOE has adopted since the
national economic downturn to manage those costs and the extent to
which those changes have enhanced its approach. To do so, GAO reviewed
relevant laws, regulations, and DOE guidance; analyzed agency
financial data; and interviewed officials.
What GAO Found:
Under its current business model, DOE has limited influence over
contractor pension and other postretirement benefit costs. For
example, contractors sponsor benefit plans and, as a result, control
the types of benefits offered to their employees and the strategies
for investing pension plan assets. DOE nevertheless ultimately bears
the investment risk incurred by the contractors. Moreover, external
factors beyond both DOE‘s and the contractors‘ control, such as
economic conditions and changes in statutory requirements, can
significantly affect benefit costs. For example, the investment
performance of plan assets can affect pension contributions, while
changes in health care law can affect postretirement benefit payments.
Even with these constraints, however, DOE can exercise some influence
over contractor pension and other postretirement benefit costs through
its oversight efforts, reimbursement policy for contractor benefit
costs, and contract requirements. Still, the department will
ultimately have to reimburse the cost of contractor pension benefits
that have already been accrued.
Since the economic downturn deepened in 2008, DOE has taken steps to
enhance its management of contractor benefit costs-”particularly for
contractor pensions”-but has not comprehensively reviewed its approach
to managing its contractors‘ other postretirement benefit costs, such
as retiree health care coverage. In addition, DOE has not added
agencywide information on the costs of its contractors‘ other
postretirement benefits to its annual budget request. As a result, DOE
may be delayed in identifying options that might better address the
growth of its reimbursement costs and may not provide important
information to Congress that could inform annual funding decisions.
Moreover, while DOE has, for the most part, continued to use the same
reimbursement policy and contract requirements from before the
economic downturn, it lacks complete guidance on how program offices
should evaluate contractor requests to contribute more than DOE‘s
minimum requirement to their pension plans. DOE is therefore unable to
ensure that its offices decide on contractor requests on the basis of
consistent criteria reflecting departmentwide goals for managing
contractor pension costs. In addition, DOE‘s existing process for
having contractors align their benefit packages with DOE‘s
reimbursement standard is incomplete. Specifically, DOE lacks a
comprehensive timetable for when contractors must modify benefit
packages whose values exceed DOE‘s standard. As a result, only 1 of
the 16 contractors with benefit packages exceeding DOE‘s standard for
the most recent evaluation period is expected to bring its benefits in
line with that standard. Further, DOE guidance allows contracting
officers to waive the requirement for contractors to correct benefit
packages exceeding DOE‘s reimbursement standard, but does not detail
the criteria contracting officers should follow in making that
decision or require a review by DOE headquarters. As a result, some
contractors may continue for an undefined period to accrue liabilities
and be reimbursed by DOE for benefit packages exceeding the
department‘s reimbursement standard.
What GAO Recommends:
GAO recommends, among other things, that DOE comprehensively review
how it manages contractor postretirement benefit costs and define
criteria for evaluating contractor requests to contribute more than
the minimum to their pension plans. DOE agreed with three of GAO‘s
recommendations but disagreed with the need to define such criteria.
View [hyperlink, http://www.gao.gov/products/GAO-11-378] or key
components. For more information, contact Mark Gaffigan at (202) 512-
3841 or gaffiganm@gao.gov.
[End of section]
Contents:
Letter:
Background:
Within Its Current Business Model, DOE Has Limited Influence over
Contractor Pension and Other Postretirement Benefit Costs:
DOE Has Taken Steps to Enhance Its Management of Contractor Pension
Costs but Has Not Comprehensively Reviewed Other Postretirement
Benefits or Issued Complete Guidance:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Comments from the Department of Energy:
Appendix II: Status of DOE Contractor Defined Benefit Plans:
Appendix III: Investment Allocation of DOE Contractors' Defined
Benefit Plans:
Appendix IV: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Areas of Contractor Control over Benefit Costs:
Table 2: Areas of Limited DOE Influence over Contractor Benefit Costs:
Table 3: DOE Contractor Tax-Qualified Defined Benefit Pension Plan
Asset Allocations, in Percentages and in Dollars, Ranked by Dollar
Amount of Assets in Equities as of September 30, 2010:
Figures:
Figure 1: DOE Contractor Qualified Defined Benefit Plans with
Liabilities Exceeding $1 Billion:
Figure 2: DOE Reimbursements for Contractor Pension Contributions and
Other Postretirement Payments for Fiscal Years 2000 through 2012:
Figure 3: Distribution of General Funding Requirement Types by DOE
Contractor Qualified Defined Benefit Plans and as a Percentage of DOE
Contractor Defined Benefit Liabilities:
Figure 4: Freeze Status of Current DOE Contractor, Tax-Qualified
Defined Benefit Plans: Cumulative Number of Freezes by Initial Year of
Freeze:
Abbreviations:
DOE: Department of Energy:
ERISA: Employee Retirement Income Security Act of 1974:
NNSA: National Nuclear Security Administration:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
April 29, 2011:
The Honorable Lamar Alexander:
Ranking Member:
Subcommittee on Energy and Water Development:
Committee on Appropriations:
United States Senate:
Dear Senator Alexander:
The Department of Energy (DOE) spends about 90 percent of its annual
budget on contracts, making it the largest civilian contracting agency
in the federal government. Under its decades-old business model, the
department relies extensively on contractors to manage and operate its
sites and carry out the bulk of its national security, environmental
cleanup, and research and development missions. As of September 2010,
DOE has 46 such contracts with private companies and nonprofit
organizations, including universities. Under the terms of these
contracts, DOE reimburses contractors for the allowable costs of
performing work, including the costs of providing pension and other
postretirement benefits--such as health care, dental, and life
insurance benefit plans--to nearly 200,000 current and former
contractor employees and their beneficiaries.[Footnote 1] The
contractors sponsor these benefit plans, but DOE is ultimately
responsible for reimbursing contractors for allowable plan costs.
Since the economic downturn deepened in 2008, DOE has had to devote
significantly more funding to reimbursing contractors for the cost of
these employee pension and other postretirement benefits--in part
because of a decline in interest rates and asset values, which has
increased the amount contractors have needed to contribute to their
pension plans. In fiscal year 2009, the department reimbursed $750
million in contractor pension costs, more than double the amount it
had reimbursed in fiscal year 2008 and significantly more than it had
budgeted for. According to DOE documents, this increase was driven in
large part by a drop in the interest rate used by contractors to
calculate their pension plan liabilities, as well as poor asset
performance due to market declines. At the same time, reimbursement
costs for its contractors' other postretirement benefits grew by 10
percent, to $389 million. Both costs remained at similarly high levels
in 2010 and, according to recent projections, may increase in coming
years. While these contractor benefit costs represent only a portion
of total contractor compensation, further growth in these costs in an
increasingly challenging budgetary environment could put pressure on
the funding available for DOE's mission-related activities.
We have previously reported on the challenges DOE faces in managing
the costs of its contractors' pension and other postretirement
benefits. In 2004, we noted that these costs were significant and
growing and recommended that DOE improve its oversight by instituting
systematic management review of contractor benefit data, extending
requirements for contractors to regularly assess the value of their
benefit packages, performing alternative procedures where such an
extension was not practical, and incorporating a focus on long-term
costs and budgetary implications of decisions pertaining to each
component of contractor benefit programs.[Footnote 2] We later found
that DOE did not always require contractors to modify benefit packages
that substantially exceeded the value of their competitors' benefits,
potentially adding billions of dollars in long-term costs that DOE
would ultimately have to reimburse.[Footnote 3] In 2008, we reported
that DOE had taken actions to address the cost of benefits contractors
offered to new employees, but that those actions were not expected to
substantially affect the department's contractor pension and other
postretirement benefit costs for the next 20 to 30 years, since
incumbent employees would continue to earn benefits under existing
plans.[Footnote 4]
In this context, you asked us to review DOE's approach to managing its
contractors' pension and other postretirement benefit costs.
Accordingly, this report examines (1) the level of control DOE has
over contractor pension and other postretirement benefit costs under
its current business model and, (2) within that model, the changes DOE
has adopted since the national economic downturn and the extent to
which these changes have enhanced its approach to managing contractor
pension and other postretirement benefit costs.
To examine the level of control DOE has over contractor pension and
other postretirement benefit costs under its current business model,
we reviewed relevant laws, regulations, contract provisions, and DOE
guidance to identify contractor and department responsibilities for
contractor benefit plans. For context, we interviewed DOE headquarters
officials and site officials responsible for overseeing contractor
operations at six facilities--East Tennessee Technology Park, Los
Alamos National Laboratory, Oak Ridge National Laboratory, Sandia
National Laboratories, the Savannah River Site, and the Y-12 National
Security Complex--and met with representatives of the contractors
responsible for managing and operating those facilities. We selected
this nonrepresentative sample to provide illustrative examples of such
factors as contractor pension plans with varying funding levels,
contractor postretirement health care plans with a range of statuses,
and facilities overseen by different program offices. To obtain
additional insight, we also met with officials from the Department of
Defense, the National Aeronautics and Space Administration, and the
National Institutes of Health to identify how those agencies manage
contractor benefit costs at government-owned, contractor-operated
facilities and how their approaches compare with DOE's. We selected
this nonrepresentative sample of agencies on the basis of the amount
they have spent on contracts for professional, scientific, and
technical services at government-owned, contractor-operated facilities
during the last 5 years. According to Department of Defense officials,
a small percentage of the department's annual budget is spent on
contractors for government-owned, contractor-operated facilities. In
fiscal year 2010, the National Aeronautics and Space Administration
spent $1.45 billion, or about 8 percent, and the National Institutes
of Health expects to have spent about $460 million, or about 1.5
percent, of their respective annual budgets on contracts for
government-owned, contractor-operated facilities. These proportions
contrast with DOE's spending about 90 percent, or $22 billion, of its
annual budget on contracts to operate its facilities. Further, we
analyzed selected budget, financial, and actuarial data on DOE
contractor pension and other postretirement benefit plans to determine
cost and liability trends and summarize plan characteristics. We
interviewed knowledgeable agency officials about the source of the
data and the controls in place to maintain their integrity and found
the data to be sufficiently reliable for the purposes of our report.
To examine the changes DOE has adopted to enhance its approach since
the national economic downturn, we synthesized information from DOE
documentation on these changes, as well as information gathered during
our interviews. We also analyzed selected DOE contract data and the
department's budget requests to Congress for fiscal years 2009 through
2012, as well as the contractors' benefit assessment studies and
selected reports to DOE on the status and management of their pension
plans.
We conducted this performance audit from May 2010 through April 2011,
in accordance with generally accepted government auditing standards.
These standards require that we plan and perform the audit to obtain
sufficient and appropriate evidence to provide a reasonable basis for
our findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides such a reasonable basis for our
findings and conclusions based on our audit objectives.
Background:
DOE's business model relies on contractors to carry out the bulk of
the department's mission activities through management and operating
contracts and other site contracts for operations at DOE-owned
facilities, while employing federal officials to set mission
objectives and provide contract oversight. This business model dates
from the Manhattan Project, when federal officials contracted with
private companies and universities to develop and produce the atomic
bomb. Under this business model, contractors manage and operate DOE
facilities--including research laboratories, production and test
facilities, and nuclear waste cleanup and storage facilities--located
throughout the country. Generally, DOE requires these contractors to
be corporate entities formed for the specific purpose of managing and
operating a facility and requires the contractors to integrate their
accounting systems and budget processes with those of the department.
DOE also generally requires contractors that take over a contract to
hire the existing contractor workforce at a facility. As a result,
with the exception of top managers, the workforce at a facility
generally remains in place despite changes in contractors. DOE
oversees contractors' activities through its headquarters program
offices--primarily the National Nuclear Security Administration
(NNSA), the Office of Environmental Management, and the Office of
Science--and site offices located at each facility.[Footnote 5]
Under its business model, DOE reimburses contractors for the allowable
costs of employee compensation, including benefits such as pension and
other postretirement benefits. DOE is ultimately responsible for
reimbursing its contractors for the cost of these benefit plans, and
reports a liability or asset in its financial statements for the
funded status--that is, plan obligations minus plan assets--of these
benefit plans.[Footnote 6] When site contracts are recompeted or
expire, it is DOE's policy to ensure the continuation of these
benefits for incumbent contractor employees and eligible retirees by,
for example, requiring the transfer of benefit plan sponsorship
responsibilities to a successor contractor or related company.
Although other federal agencies use contractors to operate facilities
and reimburse those contractors for their allowable benefits costs,
DOE is unique in the percentage of its budget that goes to site
contractors. For example, while the National Institutes of Health
funds a contractor-operated research facility and requires the
facility contractor to assume sponsorship of existing employee benefit
plans, the agency devotes only about 1.5 percent of its budget toward
this contract. In contrast, 90 percent of DOE's budget goes toward
such contracts. As a result, a large increase in reimbursement costs
for contractors' employee benefits is more likely to have a
significant impact on DOE's budget than a similar increase would for
agencies devoting a smaller percentage of their budget toward
contracts for operating government-owned facilities.
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.
[Footnote 7] As of September 2010, DOE was responsible for reimbursing
contractors for 50 defined benefit plans, including 40 qualified plans
and 10 nonqualified plans.[Footnote 8] Of the qualified defined
benefit plans, 37 are private-sector plans while 3 are public-sector
plans.[Footnote 9] DOE's contractors that sponsor private-sector
pension plans must comply with the Internal Revenue Code and the
Employee Retirement Income Security Act of 1974 (ERISA),[Footnote 10]
which establishes minimum funding standards for the amounts that
private-sector plan sponsors must set aside in advance to pay benefits
when they are due.[Footnote 11] DOE's current policy is to reimburse
contractors for contributions made by the contractors to their
qualified defined benefit plans and to reimburse contractors for their
nonqualified plans on a pay-as-you-go basis.[Footnote 12] DOE
reimburses contractors for their contributions to defined contribution
plans as well.
DOE's contractors also sponsor a variety of other postretirement
benefits plans. Although these benefits can include dental and life
insurance coverage, the majority of DOE reimbursement costs are for
retiree health care benefits. As of September 2010, DOE was
responsible for reimbursing 41 contractors for retiree health care
payments, although the specific benefits offered to retirees varied
across contractors. For these other postretirement benefits, DOE's
contractors typically do not set aside funds in advance because, in
contrast to requirements for funding pension benefits, there are
generally no requirements and few incentives to do so. As a result,
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 represent a continuing liability for DOE.
Since September 1996, DOE Order 350.1, Contractor Human Resource
Management Programs, has set forth DOE's policy for the oversight and
reimbursement of contractor benefit plans. In particular, this order
requires that DOE determine whether contractors' benefit costs are
reasonable and allowable and therefore reimbursable. To help make this
determination, DOE Order 350.1 requires that contractors "benchmark"
the value or cost of their total benefit package by conducting either
a benefit value or cost study that compares the value or costs of this
total benefit package to those of comparable organizations.[Footnote
13]
A small number of contractor pension plans account for a large
percentage of DOE's contractor pension liabilities. As shown in figure
1, 12 plans have liabilities--specifically, projected benefit
obligations--that exceed $1 billion and account for $31.4 billion, or
86 percent, of the $36.7 billion in total liabilities represented by
all DOE contractor qualified defined benefit plans. Within those 12
plans, pension liabilities are concentrated among a handful of
contractor plans.[Footnote 14] NNSA oversees contractors that sponsor
6 of the 12 plans, including the 3 largest plans that, combined,
account for over one-third of all DOE contractor pension liabilities.
Figure 1: DOE Contractor Qualified Defined Benefit Plans with
Liabilities Exceeding $1 Billion:
[Refer to PDF for image: pie-chart and associated horizontal bar graph]
Of $36.7 billion in tax-qualified DOE contractor defined benefit
pension liabilities:
12 largest plans: 86%;
28 other plans: 14%.
Key to primary DOE program providing contract oversight:
[NNSA] National Nuclear Security Administration;
[EM] Environmental Management;
[SC] Science;
[Other] Other Program Office.
12 largest plans:
Plan 1 [NNSA]:
Liabilities: $4.7 billion;
Assets: $2.7 billion.
Plan 2 [NNSA]:
Liabilities: $4.3 billion;
Assets: $2.9 billion.
Plan 3 [NNSA]:
Liabilities: $3.8 billion;
Assets: $2.5 billion.
Plan 4 [EM]:
Liabilities: $3.1 billion;
Assets: $1.6 billion.
Plan 5 [NNSA]:
Liabilities: $2.9 billion;
Assets: $1.7 billion.
Plan 6 [NNSA]:
Liabilities: $2.1 billion;
Assets: $1.5 billion.
Plan 7 [NNSA]:
Liabilities: $2.0 billion;
Assets: $1.7 billion.
Plan 8 [SC]:
Liabilities: $2.0 billion;
Assets: $1.5 billion.
Plan 9 [EM]:
Liabilities: $2.9 billion;
Assets: $0.9 billion.
Plan 10 [SC]:
Liabilities: $1.8 billion;
Assets: $1.2 billion.
Plan 11 [Other]:
Liabilities: $1.6 billion;
Assets: $0.9 billion.
Plan 12 [SC]:
Liabilities: $1.1 billion;
Assets: $0.7 billion.
Source: GAO analysis of DOE data.
Note: Graphs are based on DOE accounting and actuarial data as of
September 30, 2010. The names of these plans have been removed because
DOE believes that the plans' funded status is proprietary. The plan
numbers in this figure do not necessarily correspond to the same plans
as numbered in Table 3 of this report. For purposes of describing DOE
contractor liabilities in a consistent format, we use the projected
benefit obligation, which is a liability measure that projects benefit
obligations in accordance with U.S. generally accepted accounting
principles. Assets are measured as the fair market value of assets, a
measure also in accordance with U.S. generally accepted accounting
principles. Amounts reported on a financial accounting basis are not
the same as figures reported on a statutory funding basis.
[End of figure]
As shown in figure 2, DOE's costs for reimbursing contractor pension
and other postretirement benefits have grown since 2000 and are
projected to increase in coming years. From fiscal year 2000 to fiscal
year 2010, DOE's annual costs for reimbursing contractor pension
contributions ranged from a low of $43 million in 2001 to a high of
$750 million in 2009. Although projections of future contributions are
inherently sensitive to underlying assumptions and can change
significantly over time, DOE estimates, on the basis of data provided
by its contractors in November 2010, that necessary contractor pension
contributions may rise markedly in fiscal year 2012--to almost $1.7
billion--in large part because of expected increases among plans with
the largest liabilities. Although useful as an indicator of the
financial pressures that could lie ahead, this projection is subject
to much uncertainty because of factors that could result in changes in
the size or timing of needed contributions to meet future years'
funding requirements. Specifically, projections are particularly
sensitive to the future economic environment, especially with respect
to future interest rates and asset returns, and also could be affected
by legislative changes to funding rules. For example, an October 2009
DOE analysis showed that projected minimum required contributions
among the 10 largest contractor pension plans could vary by $2 billion
or more in any given year during fiscal years 2012 through 2019,
depending on changes in interest rates. Although DOE's reimbursement
costs for its contractors' other postretirement benefits have not
fluctuated as widely as contractor pension costs, those costs have
grown steadily since 2000 at an average annual rate of 8 percent and
are currently projected to rise at a slightly higher rate of 9 percent
over the next 5 years.
Figure 2: DOE Reimbursements for Contractor Pension Contributions and
Other Postretirement Payments for Fiscal Years 2000 through 2012:
[Refer to PDF for image: vertical bar graph]
Fiscal year: 2000;
Pensions: $58 million;
Other postretirement benefits: $205 million.
Fiscal year: 2001;
Pensions: $43 million;
Other postretirement benefits: $226 million.
Fiscal year: 2002;
Pensions: $75 million;
Other postretirement benefits: $243 million.
Fiscal year: 2003;
Pensions: $167 million;
Other postretirement benefits: $264 million.
Fiscal year: 2004;
Pensions: $279 million;
Other postretirement benefits: $342 million.
Fiscal year: 2005;
Pensions: $271 million;
Other postretirement benefits: $306 million.
Fiscal year: 2006;
Pensions: $530 million;
Other postretirement benefits: $328 million.
Fiscal year: 2007;
Pensions: $387 million;
Other postretirement benefits: $334 million.
Fiscal year: 2008;
Pensions: $351 million;
Other postretirement benefits: $354 million.
Fiscal year: 2009;
Pensions: $750 million;
Other postretirement benefits: $389 million.
Fiscal year: 2010;
Pensions: $728 million;
Other postretirement benefits: $385 million.
Fiscal year: 2011 (projected);
Pensions: $969 million;
Other postretirement benefits: $448 million.
Fiscal year: 2012 (projected);
Pensions: $1.695 billion;
Other postretirement benefits: $526 million.
Source: DOE.
Note: Amounts listed for fiscal years 2011 and 2012 are projections as
of November 2010.
[End of figure]
Within Its Current Business Model, DOE Has Limited Influence over
Contractor Pension and Other Postretirement Benefit Costs:
Under its current business model, DOE has limited influence over
contractor pension and other postretirement benefit costs.
Specifically, contractors sponsor the plans and therefore control the
types of benefits offered employees and the investment strategies for
allocating pension plan assets; they also determine the amounts paid
into plans. In addition, external factors beyond both DOE's and the
contractors' control, such as economic conditions and changes in
statutory requirements, have significant effects on benefit costs
incurred by contractors and, in turn, affect the amount of allowable
costs that DOE reimburses contractors. Despite these constraints,
however, DOE can exercise some limited influence over contractor
pension and other postretirement benefit costs through its oversight
efforts, reimbursement policy, and contract requirements.
Contractors, Not DOE, Sponsor and Manage Their Employee Benefit Plans:
DOE has limited influence over contractor pension and other
postretirement benefit costs under its current business model because
contractors, not DOE, sponsor the plans. As shown in table 1,
contractors control the types of benefits offered to employees and the
benefit plans' design.[Footnote 15] Moreover, contractors are
responsible for managing those plans, including selecting strategies
used to invest pension plan assets and determining, within statutory
requirements, how much is paid into the plans. Because contractors
control both the design and management of employee benefit plans,
their decisions can significantly affect the magnitude of benefit
costs and the volatility of pension contributions. Nevertheless,
although DOE has limited influence over these decisions, the
department is responsible for reimbursing its contractors for the
allowable costs of providing pension and other postretirement
benefits, including retiree health care, to current and former
employees and their beneficiaries.[Footnote 16]
Table 1: Table 1: Areas of Contractor Control over Benefit Costs:
Benefit plan design:
* Determine type of pension benefits offered to employees (e.g.,
defined benefit vs. defined contribution pension plan);
* Determine other postretirement benefits made available to employees
(e.g., retiree health) and employee share of costs, if any;
* Control other elements of plan design (e.g., eligibility and vesting
requirements, formulas used to determine benefits owed to employees).
Benefit plan management:
* Determine investment strategies for plan assets;
* Determine, within statutory requirements, amounts to be paid into
benefit plans.
Source: GAO analysis of DOE documents and statements made by DOE
officials.
[End of table]
According to DOE documents and officials, contractors decide what type
of benefits to provide to their employees and how to design benefit
plans, and these decisions are part of an overall compensation
strategy devised to recruit and retain the workers they need to
fulfill their mission.[Footnote 17] With respect to pensions,
contractors may offer defined benefit plans, defined contribution
plans, or both, and the content of the plans may vary. For example,
the contractor at DOE's Oak Ridge National Laboratory offers both a
defined benefit plan and a defined contribution plan to all employees,
while the contractor at DOE's Savannah River Site offers a defined
benefit plan and a defined contribution plan to employees hired before
August 1, 2008, but only a defined contribution plan to employees
hired after that time.[Footnote 18] Contractors may change the pension
benefits offered to employees, in accordance with ERISA,[Footnote 19]
and many have been doing so, echoing the overall national trend from
defined benefit to defined contribution plans.[Footnote 20] For
instance, the contractor at Sandia National Laboratories changed its
benefit package so that non-union employees hired after December 31,
2008, have a defined contribution plan, while existing employees
remain participants in a defined benefit plan.[Footnote 21]
Contractors also determine other elements of plan design, such as
eligibility and vesting requirements, within the parameters set by the
Internal Revenue Code and ERISA. Moreover, in the case of defined
benefit plans, contractors determine, among other things, the formula
used to calculate benefits owed to employees, as well as additional
provisions affecting costs, such as early retirement. In the case of
defined contribution plans, they determine how much to match employee
contributions and what investment options employees will have, among
other things.
In addition to their control over pension benefits, contractors also
control their offerings for other postretirement benefits, and they
can change these packages as they deem appropriate, subject to DOE
approval for reimbursement purposes. For example, at Sandia and Los
Alamos National Laboratories, new hires receive access-only
postretirement health care benefits, which means that, as retirees,
they will have to pay the plan's full benefit premiums.[Footnote 22]
At DOE's Savannah River Site, the contractor has steadily increased
its retirees' share of health care and dental costs since 2003,
although the contractor continues to subsidize a portion of the
premiums.
Contractors also manage the pension plans they offer, and they have a
fiduciary responsibility to manage plan assets in the sole interest of
the plans' beneficiaries.[Footnote 23] The contractors' fiduciary role
takes precedence over their responsibility to DOE and therefore limits
DOE's influence over the plans and the associated costs. Plan
management includes selecting investment strategies for defined
benefit pension assets.[Footnote 24] In choosing strategies for
investing defined benefit plan assets, contractors make a trade-off
between risk and return. For example, bonds, because of their higher
correlation to pension liabilities, can decrease the volatility in
plan funding and potentially required contributions. On the other
hand, equities generally come with greater risk, but also greater
expected returns relative to bonds. Consequently, investment
strategies relying relatively more on equity returns are likely to
provide volatile plan funding and contributions.
The performance of contractors' investment portfolios can affect the
contributions contractors make to the plans and, in turn, their
reimbursable costs. For example, declines in the fair market value of
plan investments decrease the funded status of the plan.[Footnote 25]
In such a situation, contractors may be required to increase their
annual pension contributions over a period of years, which DOE may in
turn be obligated to reimburse.[Footnote 26] Moreover, volatile
investment returns can result in fluctuations in pension contributions
from year to year. As a result, DOE ultimately bears the investment
risk incurred by the contractor sponsoring the plan. DOE officials
stated that the agency encourages contractors to make investment
decisions that reduce volatility but--because DOE's role is limited to
oversight and contractors have the fiduciary responsibility for plan
administration--does not provide guidance on how to do so, nor
otherwise dictate how contractors should allocate plan assets.
Plan management also includes making decisions about funding
contractor pension plans. Contractors, not DOE, are responsible for
determining, within statutory requirements, the amounts they pay into
their benefit plans. Funding requirements vary among the defined
benefit plans offered by DOE contractors, making it difficult to
obtain a clear picture of pension contribution requirements across
plans and over time. For example, three different sets of funding
requirements apply to the range of DOE contractor pension plans.
[Footnote 27] Additionally, three contractor pension plans, including
the second largest plan, were eligible for special provisions from
plan year 2008 to plan year 2010, which reduced their plan
liabilities.[Footnote 28] Figure 3 illustrates the distribution of
general funding requirement types among DOE contractor pension plans.
Figure 3: Distribution of General Funding Requirement Types by DOE
Contractor Qualified Defined Benefit Plans and as a Percentage of DOE
Contractor Defined Benefit Liabilities:
[Refer to PDF for image: 2 pie-charts]
Percentage of defined benefit plans by applicable funding rules:
Private sector: Single-employer plan: 80% (32 plans);
Private sector: Special rule for government contractor plan: 8% (3
plans);
Private sector: Multiemployer plan: 5% (2 plans);
Public sector: State university plan: 8% (3 plans).
Percentage of projected benefit obligations by applicable funding
rules:
Private sector: Single-employer plan: 52% ($19.1 billion);
Private sector: Special rule for government contractor plan: 13% ($4.7
billion);
Private sector: Multiemployer plan: 6% ($2.4 billion);
Public sector: State university plan: 29% ($10.5 billion).
Source: GAO analysis of DOE data.
Note: Charts are based on DOE accounting and actuarial data as of
September 30, 2010. For purposes of describing DOE contractor
liabilities in a consistent format, we use the "projected benefit
obligation," which is a liability measure that projects benefit
obligations in accordance with U.S. generally accepted accounting
principles. Percentages may not sum to 100 percent because of
rounding. The sponsoring contractors of the three "special rule" plans
have been eligible for a special government contractor provision that
allows the plan to discount the actuarial value of plan liabilities in
such a way that, all else equal, reduces plan liabilities relative to
certain other private-sector plans. To be eligible for this special
rule, a plan must be a private-sector plan maintained by a corporation
whose primary source of revenue is derived from business with the U.S.
government and is subject to federal and defense acquisition
regulations. Revenues from such business must exceed $5 billion, and
pension plan costs must be assignable to a particular accounting
standard. With respect to funding, this provision allowed eligible
contractors to measure liabilities using an alternative rate for plans
years beginning after December 31, 2007, and potentially extending
through January 1, 2011.
[End of figure]
Contractors, according to the funding requirements applicable to their
qualified pension plans, determine the minimum contribution they must
make to the plans.[Footnote 29] A contractor's minimum contribution is
generally considered an allowable cost for reimbursement by DOE
because the contractor incurs this cost to meet its contractual
obligation with DOE to maintain the pension plan's eligibility for
favorable tax treatment under the Internal Revenue Code.[Footnote 30]
While contractors are obligated to pay only the minimum required
contribution, under DOE policy they can also ask the department to
reimburse them if they contribute more than the minimum. A contractor
might choose to contribute more than the minimum in the current year
to, for example, avoid benefit restrictions that would otherwise come
into effect on the basis of the pension plan's funding level.[Footnote
31] In addition, a contractor might wish to contribute more than the
minimum to build credit balances that it could use in future years to
try to level the amount it budgets for pension contributions.[Footnote
32]
External Factors beyond DOE and Its Contractors' Control Can
Significantly Affect Benefit Costs:
External factors over which DOE and its contractors have no control,
including economic conditions and changes in statutory requirements,
can significantly affect contractor reimbursement costs. For instance,
changes in economic conditions can significantly affect necessary
pension plan contributions, which are, in part, determined by
actuarial assumptions about the future, and these assumptions are used
to calculate the value of plan assets and liabilities, such as
employee turnover, and compensation increases. Furthermore, minimum
contribution requirements can vary from year to year as the result of
fluctuations in the investment performance of plan assets. For
example, the significant decline in value of the financial markets in
2008 caused a considerable drop in plan assets. In addition, changes
in the interest rate can significantly affect contractor pension
contributions.[Footnote 33] For instance, according to DOE officials,
a drop in interest rates has contributed to increases in calculated
plan liabilities, which, along with other factors, has led to a
significant increase in contractor pension contributions. Officials
further noted that, in part because of recent economic conditions,
some contractors contributed to their pension plans for the first time
in years.[Footnote 34] For example, a contractor at Oak Ridge National
Laboratory told us that in fiscal year 2010, in part as a result of
the recent financial market crisis and changing interest rates, it
budgeted for the first contributions to the site's defined benefit
plan since 1984.[Footnote 35] The variability in investment returns
and interest rates, which influences the calculation of plan
contributions, also adversely affects DOE's ability to accurately
forecast the costs of pension contributions in its budget
requests.[Footnote 36]
Changes in economic conditions can also affect other postretirement
benefit costs.[Footnote 37] Changes in health care and other cost
trends can influence the cost of these benefits and, in turn, the
amount that must be reimbursed by DOE. For example, officials at DOE's
Savannah River Site explained that as health care costs increase
nationally, the cost of providing retiree health care to their
employees has also increased. Los Alamos National Laboratory officials
attributed their rising health care costs to a variety of factors,
including increases in emergency room and radiology costs.
Changes in statutory requirements can also have a significant effect
on contractor benefit costs. For example, the funding requirements
that govern a large majority of DOE contractor private-sector pension
plans have been changed or significantly amended over the last 5
years. One of the most sweeping amendments to ERISA and the minimum-
funding rules occurred with the passage of the Pension Protection Act
of 2006.[Footnote 38] This act--prompted, in part, by the default of
several large pension plans--increased the minimum funding
requirements for pension plans and sought to strengthen the private
pension system.[Footnote 39] Many of the funding rule changes for
single-employer plans came into effect slowly, however, and included
special rules that provided funding relief for certain plan sponsors.
Additionally, almost as soon as the act began to take effect in 2008,
the economy weakened, and further statutory and regulatory changes
occurred that had the overall effect of reducing or delaying pension
contributions that would otherwise have been required.[Footnote 40]
The number and timing of statutory and regulatory changes since the
enactment of the Pension Protection Act of 2006 makes it difficult to
determine how much of an effect the law has had on contractor
contribution requirements. During our site visits, some contractors
reported an increase to their minimum required contributions since the
act's implementation, but these increases are the combined result of
multiple factors, including economic and demographic experience and
legislative changes. Contractor costs for other postretirement
benefits can also be influenced by changes in statutory requirements.
For instance, according to DOE documentation, passage of the Patient
Protection and Affordable Care Act in 2010[Footnote 41] may affect
contractors' other postretirement benefits in a variety of ways, such
as by levying an excise tax on high-cost health plans.
DOE Can Exercise Some Influence over Benefit Costs through Its
Oversight Efforts, Reimbursement Policy, and Contract Requirements:
Despite the constraints posed by DOE's current business model, our
analysis of DOE documents--including department policy, budget
documents, and contract provisions--indicates that the agency has
several means--oversight efforts, reimbursement policy, and contract
requirements--by which it can exercise some limited influence over
contractor pension and other postretirement benefit costs (see table
2). While DOE will ultimately have to reimburse the cost of contractor
pension benefits that have already been accrued, it can use these
means to exert some influence over future benefit costs.
Table 2: Areas of Limited DOE Influence over Contractor Benefit Costs:
Oversight:
Determines the amount of detailed information collected from
contractors on benefit costs and the degree to which the information
is reviewed and communicated to others (e.g., congressional decision
makers); this does not directly control costs, but it does increase
awareness of cost management and encourages discussion with
contractors on ways to mitigate costs.
Reimbursement policy:
Establishes requirements defining the extent to which contractor
benefit costs qualify for reimbursement (e.g., approving any benefit
plan changes that affect reimbursement, defining the amount of pension
contributions that DOE will reimburse the contractor).
Contract requirements:
Establishes contract provisions defining degree of flexibility that
contractors have in structuring and changing their benefit packages.
Source: GAO analysis of DOE documents.
[End of table]
First, DOE decides its degree of oversight over benefit costs,
including the amount of detailed information related to these costs
that it collects and reviews and the extent to which it communicates
that information to department officials and congressional decision
makers. While DOE's oversight efforts do not control costs directly,
according to department officials, they help increase awareness of
cost management on the part of both the department and contractors and
can encourage discussion between the two on ways to mitigate costs
where appropriate. Specifically, DOE determines the amount of
information contractors must provide about benefit costs and the
frequency with which they must do so, the degree of departmental
review, and how readily available that information is to decision
makers. For instance, DOE policy requires contractors to periodically
assess their benefit packages and submit the results of these
evaluations to the department. Generally, the contractor must take
corrective action if the value of the benefit package exceeds 105
percent of comparable companies' plans.[Footnote 42] Moreover, DOE
requires contractors to provide the department with cost projections
and information on direct and indirect costs as they relate to pension
and other postretirement benefits.
Second, through its reimbursement policy, DOE sets requirements that
determine the extent to which contractor benefit costs qualify for
reimbursement. In April 2006, in response to growing liabilities for
contractor employee benefits, DOE issued Notice 351.1, which provided
that the department would continue to reimburse contractors for the
allowable benefit costs for incumbent employees and eligible retirees
but limit reimbursement for new employees to the costs of "market-
based" pension and health benefit plans. A pension plan was deemed
market-based when, among other things, the plan was a defined
contribution plan. In June 2006, however, DOE suspended the notice,
and in response to stakeholder and congressional concerns,
subsequently decided not to reissue it.[Footnote 43] Although the
policy change was ultimately reversed, it demonstrated that DOE can
potentially use its reimbursement policy to exercise some influence
over contractor benefit packages. Currently, DOE policy provides for
reimbursement of a contractor's minimum required pension contribution
while giving program offices the discretion to approve higher
reimbursement levels. In addition, in accordance with department
policy, contractors must obtain DOE approval for any plan changes that
can affect reimbursement costs. In asking to change a plan, a
contractor must submit justification that, among other things,
estimates savings or costs and provides the basis for this
determination.
Third, DOE establishes contract requirements that determine the degree
of flexibility contractors have in structuring and modifying their
benefit packages and, through these requirements, can exercise some
influence over contractor decisions on benefits. Although DOE cannot
unilaterally alter an existing contract, it can negotiate with a
contractor to include new provisions in an existing contract, as well
as in a contract that is extended or newly awarded. By contractually
obligating successor contractors to assume sponsorship of existing
benefit plans, DOE has generally required that benefits be continued
for existing employees and eligible retirees. Since 2005, however, the
department has used a contract provision requiring contractors to
provide market-based pension and health care benefit plans for new
employees.[Footnote 44] As a result, some contractors have shifted
from providing all employees defined benefit plans to offering new
employees defined contribution plans, and some contractors have also
stopped providing other postretirement benefits to new employees. For
example, in 2006, the new contractor that assumed responsibility at
Los Alamos chose to offer new employees only a defined contribution
plan, while giving incumbent employees who worked at the site before
the transition the option of participating in a defined benefit plan
or the defined contribution plan.[Footnote 45] The contractor at
Savannah River also closed its defined benefit plan to employees hired
after 2009 and, in addition, ceased offering some other postretirement
benefits to new employees. According to NNSA officials, NNSA is now
exploring a further shift in contract requirements for sites it
oversees, to allow successor contractors to alter existing employees'
benefit packages.[Footnote 46]
DOE Has Taken Steps to Enhance Its Management of Contractor Pension
Costs but Has Not Comprehensively Reviewed Other Postretirement
Benefits or Issued Complete Guidance:
Since the economic downturn deepened in 2008, DOE has taken steps to
enhance its management of contractor benefit costs--particularly for
contractor pensions--but gaps remain in its approach. Before 2008, DOE
had made some changes but had not exercised the full range of measures
at its disposal. Since then, DOE has taken additional steps to address
its approach to contractor benefit costs, but more could be done.
Specifically, DOE has strengthened its oversight of contractor pension
costs, but it has yet to review its approach to overseeing other
postretirement benefit costs or to clearly inform Congress of those
costs and their potential impact on mission work. As a result, DOE may
be delayed in improving its oversight of those benefits, and
potentially not provide important information to Congress that could
inform annual funding decisions. DOE has, for the most part, continued
to insert the same contract requirements since 2005 and use the same
reimbursement policy since 1996, but it lacks clarifying guidance to
ensure a consistent approach to evaluating contractor benefit costs.
As a result, DOE is unable to ensure that program offices apply that
policy consistently, and it continues to reimburse contractors for
benefit packages that have exceeded its standard for a prolonged
period.
DOE Has Strengthened Its Oversight of Contractor Pension Costs, but It
Has Yet to Review and Clearly Communicate to Congress the Cost of
Other Postretirement Benefits:
DOE has strengthened its oversight of contractor pension costs by
changing how it collects, analyzes, and communicates information on
those costs. First, in a January 2010 memo, the department announced
the creation of an annual review process to more systematically
analyze the status of each contractor's pension plan and the
contractor's strategy for managing the plan. Second, DOE created a
central database in October 2010 to regularly collect and report
information on contractor benefit costs. Third, DOE increased the
information it communicates to Congress on contractor pension costs by
adding an explanation of those costs to its fiscal year 2011 budget
request. The department has done less on other postretirement benefit
costs, however. DOE officials had stated that they expected to begin a
review in spring 2010 of the department's approach to other contractor
benefits similar to the one done for contractor pensions, but as of
January 2011, the department has not followed through with these
plans. Moreover, DOE has not added information to its budget request
on its contractors' nonpension postretirement benefit costs. While
contractor pension costs have risen sharply since 2009, the cost of
other postretirement benefits is also significant and growing.
In January 2010, DOE set up an annual review process for contractor
pensions that allows the department to more systematically analyze
contractor pension data and each contractor's strategy for managing
its plan. Specifically, DOE guidance requires each contractor to
submit a standard report on its pension plans at the start of each
year. This report must include information on the plan's current
funding status and the contractor's estimates for how much it will
need to contribute to the plan during the current fiscal year and the
4 fiscal years after that. In addition, the contractor must provide
the key assumptions and methods used to develop its estimates. If the
estimates indicate that a plan's funding level could drop enough to
force the contractor to impose benefit restrictions, the contractor
must describe the impact of the benefit restrictions, the number of
employees the restrictions might affect, the additional funds needed
to avoid those restrictions, and whether it recommends contributing
those funds to the pension plan.[Footnote 47] The contractor must also
include an assessment of its pension plan's investment management and
the results of its current investment strategy. After contractors
submit this report, DOE guidance requires contractor personnel to meet
with department officials from headquarters and the field to discuss
the contractor's pension strategy and the reasons for any differences
between its current pension contribution estimates and prior
estimates. In addition, DOE officials and contractor personnel are to
discuss how the contractor intends to increase the predictability of
its pension contributions and contain current and future costs.
According to DOE guidance, a goal of this annual review process is to
improve the accuracy and predictability of DOE budget forecasting for
funding its contracts by requiring contractors to provide their
estimated contribution amounts to their pension plans, both for the
immediate year and the subsequent years, on the basis of a range of
actuarial assumptions. In addition, these discussions are meant to
provide DOE with opportunities to increase its ability to share
information concerning contractor costs with key stakeholders across
the department.
DOE has also created a central database to regularly collect
information on contractor benefit costs, which is intended to
facilitate analysis, as well as ensure current reporting on those
costs. DOE set up the database in October 2010 and is requiring
contractors to regularly update information on their benefit plan
costs and characteristics. Specifically, DOE guidance requires
contractors to report on, among other things, their current pension
assets and liabilities and 5-year budget projections for pension and
other benefits. Before implementing the database, DOE relied on ad hoc
data requests to contractors to collect information on pension plans
and other postretirement benefits. For example, in 2010, DOE requested
pension and other benefit data from each contractor and shared that
information in the form of site-specific "snapshots" to all of its
contractors and program offices. In contrast to these data requests,
which DOE and contractor officials at several sites found redundant or
time-consuming, DOE guidance explains that the database is intended to
provide a structure for capturing information obtained through the
annual pension review process, as well as to expand data collection to
other contractor benefits and readily report information on those
benefits. By scheduling regular data requests and storing information
in a central system, DOE has taken actions that help to streamline the
data collection process and facilitate analysis and up-to-date
reporting on contractor benefit costs.
While DOE has reviewed its approach to overseeing contractor pension
plans, it has yet to devote a similar level of attention to other
postretirement benefits. While our analysis of DOE financial data
indicates that other postretirement benefit costs have generally been
less volatile than those of pension plans, these costs have steadily
risen over the last 10 years, amounting to $385 million in fiscal year
2010. According to federal standards for internal control, federal
agencies are to employ internal control activities, such as top-level
review, to help ensure that management's directives are carried out
and to determine if the agencies are effectively and efficiently using
resources to assess risks from both internal as well as external
sources.[Footnote 48] Consistent with these standards, DOE has
collected and analyzed some information on the risk it faces from
other postretirement benefits. For example, in May 2010 DOE issued a
summary of its analysis on contractor pension plan and other benefits,
including postretirement health care benefits. But it has not
comprehensively reviewed its approach to overseeing those benefits or
correspondingly changed its policy on how it manages other contractor
benefit costs. DOE officials had stated that they expected to begin a
review of benefits other than pensions in spring 2010. As of January
2011, however, DOE had yet to begin its planned review, according to
an agency official, because of the department's continuing work on
contractor pensions. This official stated that the department still
planned to review its approach to other postretirement benefits, but
it was not clear when the review would begin.
Without comprehensively reviewing its approach to overseeing other
contractor benefits, including postretirement benefits other than
pensions, DOE may be delayed in improving its oversight of those
benefits and identifying policy options that might reduce or better
address the growth of reimbursement costs. For example, in a 2004
report on this topic, we recommended that DOE incorporate into its
oversight process a focus on the long-term costs and budgetary
implications of decisions pertaining to each component of contractor
benefit programs, especially pension and postretirement health
benefits, which have budgetary requirements beyond the current year.
[Footnote 49] DOE has taken steps to incorporate such a focus into its
oversight of contractor pension costs through its annual review
process, but it has yet to incorporate a similar focus on long-term
costs and budgetary implications into its oversight process for other
postretirement benefit costs. Further, while DOE reimburses other
postretirement benefits on a pay-as-you-go basis, an option for
addressing its liabilities is to reimburse contractors for prefunding
some or all retiree benefits, particularly those associated with
health care, before employees retire. By reimbursing contractors for
prefunding these benefits, DOE may be able to reduce the unfunded
liability reported in its financial statements and take advantage of
the compounding effects of investment returns on plan assets.
Nevertheless, while prefunding more effectively recognizes costs when
the associated work is being performed, in the short term prefunding
might require higher contractor contributions, which would in turn
increase DOE's short-term reimbursement costs. In addition,
opportunities for prefunding other postretirement benefits and
nonqualified pension benefits are more restricted than for tax-
qualified benefits. By not comprehensively reviewing its approach to
its contractors' other postretirement benefits, DOE has yet to
systematically weigh the advantages and disadvantages of these and
other potential policy changes that might enhance its approach.
Moreover, although DOE has taken steps to improve its communication to
Congress of key information concerning contractor pension costs, it
has yet to provide similar information on the costs of other
postretirement benefits and their potential impact on mission work.
DOE expanded the information it provides to Congress in its fiscal
year 2011 budget request by adding a discrete section explaining
contractor pension costs.[Footnote 50] This section outlined
contractor pension costs for the upcoming fiscal year and 2 prior
years by program office and site. In addition, the section included a
discussion of the challenges and risks DOE faces in managing
contractor pension costs. The addition of this information is an
improvement over prior budget requests, which included only isolated
references to contractor pension costs and did not provide an
agencywide picture of the magnitude of those costs. But DOE did not
provide the pension information in a format consistent with the
appropriation accounts that Congress uses to provide funding to the
department. As a result, the information may be less useful to
Congress than it otherwise could be. Moreover, DOE did not include
agencywide information on other postretirement benefit costs in its
fiscal year 2011 request, nor did it add such information to its
fiscal year 2012 request. Yet DOE reimbursements to contractors for
other postretirement benefits have risen steadily from roughly $306
million in fiscal year 2005 to $385 million in fiscal year 2010. By
not including an explanation of these costs in its budget request, DOE
is not providing Congress with complete information on the full cost
of its contractor retirement benefits and their potential impact on
the resources DOE has available to accomplish its mission work. As a
result, Congress lacks important information that could inform its
annual funding decisions.
DOE Has Largely Continued Its Existing Contract Requirements and
Reimbursement Policy but Lacks Clarifying Guidance to Ensure a
Consistent Approach to Contractor Benefit Costs:
DOE has, for the most part, continued to insert the same contract
requirements since 2005 and use the same reimbursement policy from
1996, but it lacks complete guidance on how program offices should
evaluate contractor requests to contribute more than the minimum
required to their pension plans, and it also lacks a comprehensive
timeline for modifying contractor benefit packages with values that
exceed DOE standards. DOE has inserted language into new and renewed
contracts that ties the reimbursement of contractor benefit costs for
new employees to market-based benefit packages and increases how
frequently contractors must assess their benefit packages. DOE Order
350.1 does not reflect these updated requirements, although DOE
officials said the department plans to revise the order by removing
certain sections and adding applicable provisions to its acquisition
regulations. But because of procedural delays and the sensitive nature
of the order's content, officials stated they do not expect this
revision of the order for some time.
Aside from a brief change in 2009, DOE has largely maintained its
reimbursement policy for contractor benefits.[Footnote 51] The Office
of Management and Budget's implementing guidance emphasizes the need
for agencies to develop policies that ensure the effectiveness and
efficiency of their operations. In keeping with this guidance, DOE's
policy, as reflected in DOE Order 350.1, is to reimburse contractors
for the minimum amount required by ERISA or more on a case-by-case
basis.[Footnote 52] Also in keeping with Office of Management and
Budget guidance, DOE reimbursement policy defines the reasonableness
of reimbursement costs by requiring contractors to benchmark the value
of pension and other benefits with those of comparable companies and
to reduce the value of benefits if they exceed the overall benchmarked
average by more than 5 percent.
Nevertheless, DOE lacks complete guidance on how its program offices
should evaluate contractor requests to contribute more than the
minimum required to their pension plans in order to carry out this
revised policy. In particular, DOE has not outlined a standard process
or criteria for evaluating requests to contribute more. Despite Office
of Management and Budget criteria, DOE program officials we
interviewed were not aware of any departmentwide guidance on factors
to consider when deciding to approve or deny contractor requests to
contribute more than the minimum. For instance, DOE does not specify
whether program offices should place a higher priority on minimizing
contribution volatility or reducing cost when evaluating contractor
requests.[Footnote 53] As a result, DOE's program offices use
different evaluation procedures and may not consider the same factors
when deciding whether to approve or deny contractor reimbursement
requests.
By using different evaluation procedures, DOE program offices may
implement DOE's reimbursement policy inconsistently. For example,
according to DOE officials, NNSA and the Office of Science have
generally approved contractor requests to contribute additional funds
to their pension plans for reasons such as leveling site or program
office budget costs, while the Office of Environmental Management has
generally denied such requests and instead directed those additional
funds toward mission work. In particular, one site official stated
that Environmental Management's denial of a contractor request to
contribute more than the minimum in 2010, with the intent of reducing
future reimbursement costs, prompted the site to alter its planned
budget allocations and mission work. Additionally, this denial
resulted in a drop in the plan's funding to a level at which plan
restrictions went into effect for employees. In contrast, NNSA
approved a similar request aimed at managing the anticipated rise in
future pension costs. NNSA officials stated that in making these
decisions, the office considers whether the contractor has made a
compelling case that the higher contribution will reduce or level
future budget costs. According to another DOE official, the Office of
Science uses a set of criteria based on prior pension management
performance, as well as an analysis of the contractor's assumptions
and investment strategies. An official from the Office of
Environmental Management stated that, unlike NNSA and the Office of
Science, the office will not reimburse pension contributions exceeding
the minimum unless funding at the minimum level would restrict
benefits. Without standard guidance for its program offices, DOE is
unable to ensure that its offices are deciding on contractor requests
on the basis of consistent criteria reflecting departmentwide goals
for managing contractor pension costs. As a result, program offices
may not systematically consider both near-term mission needs and
potential spikes in future reimbursement costs when reaching their
decisions.
In addition, DOE's existing process is incomplete for correcting
contractor benefit packages that exceed its reimbursement standard.
Specifically, DOE lacks a comprehensive timetable for when a
contractor must modify the value of its benefit package to fall within
DOE's reimbursement standard. DOE requires contractors to regularly
assess whether the value of their benefit packages is reasonable
relative to comparable companies and to take corrective actions if
they do not meet that standard.[Footnote 54] Specifically, DOE
guidance requires contractors to implement corrective action plans if
the assessments, known as value studies, show that the value of a
contractor's benefit package is more than 5 percent of the average
value of 15 selected entities in similar lines of industry.[Footnote
55] DOE guidance stresses that the goal of the value study is to
measure the relative worth of a contractor's total benefits package,
regardless of the actual payroll costs associated with the benefits.
[Footnote 56]
DOE guidance requires contractors to implement corrective action plans
within 2 years, but the guidance does not include a defined timeline
by when contractors must submit, and DOE contracting officers must
decide whether to approve, contractors' corrective action plans. As a
result, some contractors with benefit package values exceeding 105
percent may spend several years developing corrective action plans.
From our analysis of DOE data, of the 20 contractor benefit packages
most recently assessed as exceeding the 105 percent standard, 3 were
being corrected as of February 2010. Of those 3 benefit packages, one
is expected to be reduced to below DOE's standard, but another is
expected to exceed DOE's standard even after the contractor finishes
taking its corrective actions, and it is unclear whether the third
benefit package's corrective actions will bring the score to below
DOE's standard.[Footnote 57] Contractors for 5 benefit packages that
exceed DOE's standard, some from as early as 2008, have yet to
implement corrective action plans, either because the contractors are
developing them or because DOE has yet to approve them.[Footnote 58]
For example, one contractor whose August 2008 value study showed its
benefits exceeding the threshold value does not yet have an approved
corrective action plan, more than two and a half years after
discovering its benefits were too high. According to a DOE document,
the contractor submitted a corrective action plan that was disapproved
by NNSA and, after analyzing different alternatives at NNSA's request,
decided to resubmit its original plan for reconsideration. As of
February 2011, NNSA had notified the contractor that approval of its
corrective action plan was being deferred pending the results of the
contractor's 2011 value study. In another instance, DOE directed a
contractor to develop a corrective action plan in May 2010 after the
contractor's July 2009 value study exceeded DOE's standard. According
to a DOE document, the contractor submitted a corrective action plan
in September 2010, but that plan has yet to be approved by NNSA
because the plan, as submitted, was lacking in detail. As a result,
only one contractor with benefit packages exceeding DOE's standard for
the most recent evaluation period is expected to bring its benefits in
line with DOE's requirements.
Furthermore, DOE guidance states that, on the basis of a contractor's
written justification, contracting officers may waive the requirement
for contractors to develop a corrective action plan. But neither DOE
policy nor guidance provide details on the process the contracting
officers should use or the factors they should consider when deciding
whether to waive the corrective action plan requirement. Moreover, the
DOE headquarters offices with responsibility for overseeing contractor
human resource management issues are not required to review the
contracting officers' decisions to issue waivers.[Footnote 59] In
addition, a DOE official stated that the agency does not have
departmentwide criteria for evaluating contracting officers' rationale
for waiving corrective action. As a result, DOE lacks assurance that
contractor requests to waive corrective action plans are being
consistently evaluated across the department or that decisions to
allow benefit plans to remain above DOE's standard--sometimes
significantly--are based on departmentwide criteria.[Footnote 60] For
the most recent value study, our analysis of DOE data showed that
contracting officers issued waivers to eight contractors for a range
of reasons, including marginal differences between DOE's standard and
the contractor's score and recognition of a contractor's previous
efforts to reduce its score. Also according to DOE data, officials
waived the requirement for one contractor whose score exceeded the DOE
standard in part because of opposition from the site's employee group.
As a result, contractors whose scores exceed DOE's standard may remain
above that level for an undefined period and continue to accrue
liabilities and be reimbursed for the cost of benefits that may not
meet DOE's standard.
Conclusions:
Given DOE's long history of using contractors to accomplish its
mission and its growing unfunded liabilities for contractor pension
and other postretirement benefits, it is important that DOE manage its
contractual obligations associated with those benefits so as to ensure
both the successful accomplishment of its mission objectives and the
cost-effective use of government resources. While contractor
retirement benefits are only one piece of total contractor
compensation, in an era of federal budget constraints, DOE will likely
continue to face significant challenges managing the costs of those
benefits and mitigating their impact on funding available for the
department's mission activities. In particular, in some cases it will
have to reimburse the costs of the substantial pension liabilities its
contractors have accumulated over decades. While the volatility of
pension contributions and the growth in other postretirement benefit
costs are not unique to DOE's contractors, the department's extensive
reliance on contractors and its limited influence over their benefit
packages makes the department's budget particularly sensitive to these
factors. DOE's recent review of contractor pension plans and the
resulting oversight and transparency improvements are positive steps.
Nevertheless, DOE has yet to comprehensively review its approach to
managing other postretirement benefit costs as it has for contractor
pensions, although the cost of these benefits is growing and could put
pressure on the department's budget in coming years. Without
comprehensively reviewing its approach to managing other contractor
benefit costs, DOE may miss opportunities to make policy changes that
could improve oversight, enhance efficiency, and potentially reduce
its reimbursement costs in the future.
Moreover, given the potential magnitude of contractor benefit costs,
it is important that DOE keep Congress informed about amounts budgeted
for all such costs, the factors that affect those costs, and the
department's plans for mitigating possible mission impacts if
contractor benefit costs rise. DOE is collecting this information from
its contractors but, with the exception of defined benefit plans, has
yet to provide Congress with agencywide information on contractor
benefit costs for use in annual budget deliberations. Without this
information, policymakers will not have a full understanding of the
context in which they are making funding decisions or of how benefit
reimbursement costs might affect the department's mission work in
coming years.
It is also important that DOE consistently apply its policies for
overseeing and reimbursing contractor benefit costs to ensure timely
compliance by all contractors. Without consistent criteria for program
offices to consider when evaluating contractor requests to contribute
more to their pensions than the minimum required by law, department
management lacks assurance that its offices are systematically
considering both near-term mission needs and potential spikes in
future reimbursement costs when reaching their decisions. Furthermore,
without a defined timetable for when corrective action plans need to
be in place or clear criteria for DOE contracting officers to use in
deciding to waive corrective action, DOE will continue to have
contractor benefit packages with values exceeding its standards and
will accrue additional liabilities--which the department must
ultimately reimburse--for an extended period of time. In addition,
without headquarters review of contracting officer decisions to waive
corrective action plans, DOE lacks assurance that contractor waiver
requests are being evaluated consistently across the department.
Recommendations for Executive Action:
To further improve DOE's approach to managing contractor pension and
other postretirement benefit costs, we recommend that the Secretary of
Energy take the following four actions:
* Conduct a comprehensive review, similar to the review of contractor
pensions, of the department's approach to managing other contractor
benefit costs, including other postretirement benefits, and evaluate
options for improving oversight and better managing the cost of these
benefits.
* Expand the information provided to Congress during its annual budget
deliberations to include, for example, nonpension postretirement
benefit costs by site, program office, and appropriation account, as
well as a discussion of factors that affect these contractor benefit
costs and DOE's plans for managing those costs in coming years.
* Issue guidance to program offices overseeing contractors with
defined benefit plans that defines criteria to be considered when
evaluating contractor requests to contribute more than the minimum to
their pension plans.
* Clarify existing guidance on correcting contractor benefit packages
that exceed DOE's standard by:
- establishing a defined timeline by when contractors must submit
corrective action plans to their DOE contracting officer if the value
of their benefit package is determined to exceed DOE's standard, as
well as a timeline for when DOE contracting officers must reach a
decision on such plans;
- developing criteria for contracting officers to use when deciding
whether to waive a required corrective action plan; and:
- requiring review of these contracting officer decisions by the
responsible headquarters office to help ensure consistent application
of the criteria across the department.
Agency Comments and Our Evaluation:
We requested comments on a draft of this report from the Secretaries
of Defense, Energy, and Health and Human Services, and from the
Administrator of the National Aeronautics and Space Administration.
The Secretaries of Defense and Health and Human Services and the
Administrator of the National Aeronautics and Space Administration had
no comments. On April 18, 2011, we received written comments from the
Department of Energy, which are summarized below and reprinted in
appendix I. In addition, DOE provided technical comments, which we
incorporated in the report as appropriate.
In its written comments, DOE did not state whether it concurred with
our findings. DOE agreed with three of our recommendations but
disagreed with the recommendation that the Secretary of Energy issue
guidance to program offices that defines criteria to be considered
when evaluating contractor requests to contribute more than the
minimum to their pension plans. DOE stated that more stringent
guidance regarding the use of additional funds is not needed and that
each program office is best suited for determining whether additional
contributions are the best use of funds in a given year. We did not
recommend that DOE issue more stringent guidance or that program
offices should have less flexibility in deciding whether to approve or
disapprove contractor requests. Rather, we noted that DOE lacks
complete guidance to its program offices on the common factors that
they should consider when making their decisions. We agree that
program offices may reasonably come to different decisions given their
particular circumstances. Nevertheless, we continue to believe that
DOE should provide a consistent set of factors for program offices to
consider when making those decisions. Without such criteria, DOE lacks
assurance that program offices are systematically considering both
near-term mission needs and potential spikes in future reimbursement
costs when reaching their decisions.
As agreed with your office, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
from the report date. At that time, we will send copies to the
appropriate congressional committees; Secretaries of Energy, Defense,
and Health and Human Services; Administrator of National Aeronautics
and Space Administration; and other interested parties. The report
will also be available at no charge on GAO's Web site at [hyperlink,
http://www.gao.gov].
If you or your staff have any questions about this report, please
contact me at (202) 512-3841 or gaffiganm@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. Key contributors to this report are
listed in appendix IV.
Sincerely yours,
Signed by:
Mark E. Gaffigan:
Managing Director:
Natural Resources and Environment:
[End of section]
Appendix I: Comments from the Department of Energy:
Department of Energy:
Washington, DC 20585:
April 18, 2011:
Mr. Mark Gaffigan:
Managing Director, Natural Resources and Environment:
U.S. Government Accountability Office:
441 G Street:
Washington, D.C. 20548:
Dear Mr. Gaffigan:
The Department of Energy (DOE or Department) has reviewed the Draft
Government Accountability Office (GAO) Report entitled "Department of
Energy Progress Made Overseeing the Costs of Contractor Postretirement
Benefits, but Additional Actions Could Help Address Challenges" (GA0-
11-378).
The Department is pleased that the GAO recognizes the progress that
has been made with respect to providing oversight to the costs
associated with contractor postretirement benefits while also
recognizing that additional steps are needed. In addition, we
appreciate the GAO's recognition of the parameters under which the
Department operates with respect to contractor benefits.
In the past year, in an effort to improve oversight, the Department
has:
* developed a central repository for pension and postretirement plan
information which increases the ease in collecting updated information
from the contractors as well as provides Department users with the
ability to compare information among the plans and determine trends
among the contractor populations;
* acquired the capability to model financial and economic impacts
across the complex's contractor pension plans;
* completed the second annual comprehensive pension management plan
review (as discussed in the Draft Report) that furthers the robust
interchange between the Department and its Management and Operating
(M&O) and facilities management contractors; and;
* initiated the second annual survey of the comprehensive contractor
employee benefits analysis which will again be shared with the
contractors and programs as well as compared to industry benchmarks.
This process continues to encourage contractors to share best
practices regarding plan management and communicate the Department's
concerns with respect to the costs associated benefits.
It is important to note that one of the contributing factors to the
increased costs associated with the contractor pension plans is the
change in funding requirements that were imposed by the 2006 Pension
Protection Act (PPA). The specific changes contributing to the rising
costs of these plans include: 1) a lower required interest rate to
value the liabilities; 2) a shorter smoothing period to determine the
plan assets; and, 3) acceleration of the period over which the
shortfall must be made up.
We understand that using the projected benefit obligations and assets
from the Department's financial statements provides the GAO with a
straightforward manner of comparing the contractor plans since the
liabilities for each of the plans are determined using the same
discount rate (5 percent) and determined as of the same date (September
30, 2010). However, the DOE emphasizes that actual reimbursements of
pension contributions are based on the much higher interest (discount)
rates actually used by the plans and on liability figures that do not
reflect assumed future salary increases as do the liabilities
disclosed in the Department's financial statements, as shown in Figure
1 of the Draft Report. Thus, the liabilities used in the comparisons
are much higher than the liabilities used to determine the
contributions that are actually reimbursed.
As mentioned in the Draft Report, there were three single contractor
employer plans that were exempt from the PPA requirements until fiscal
year 2011. One of those plans is the second largest contractor plan by
financial statement measurements, and its reimbursable contributions
were therefore based on liabilities much less than those shown in
Figure 1 of the Draft Report.
It is important to note, that while DOE is not the plan sponsor or the
employer, DOE does more than reimburse costs for these plans. The DOE
approved the initial adoption of these plans and must approve any non
statutory pension plan changes that may increase costs or liabilities.
While at the time of a new contract, the DOE has generally required
contractors to assume sponsorship of the defined benefit plans
covering eligible legacy employees, the contractors have much more
flexibility with respect to developing benefit packages for other
employees so long as the packages are designed to attract and retain a
work force suited to the missions involved. Departmental funding
policy also clearly states that contractors will be reimbursed for the
minimum required contribution pursuant to Employee Retirement Income
Security Act (ERISA), unless the Department approves an exception.
That policy in turn would be expected to influence the contractor's
funding decisions with respect to these plans.
Enclosed are the Department's detailed response to GAO's specific
recommendations and separate technical and factual comments on
specific language in the Draft Report. We look forward to working with
your team on future engagements.
Sincerely,
Signed by:
Christine Marcus:
Deputy Chief Financial Officer:
[End of letter]
GAO-11-378: "Department of Energy Progress Made Overseeing the Costs of
Contractor Postretirement Benefits, but Additional Actions Could Help
Address Challenges"
Response to the GAO Recommendations for Executive Action:
Recommendation 1: Conduct a comprehensive review, similar to the
review of contractor pensions, of the department's approach to
managing other contractor benefit costs, including other
postretirement benefits to evaluate options for improving oversight
and better managing the costs of these benefits.
DOE Comment: DOE agrees that the postretirement benefits programs of
contractors would benefit from additional oversight from the DOE. In
connection with the benefits survey, the DOE is asking for five year
projections of postretirement contributions and intends to combine
information gathered during the survey with the information gathered
for financial statement purposes in order to make a better
determination of the expectation of future costs associated with these
plans.
The DOE will weigh the advantages and disadvantages of including an
annual review and discussion of the postretirement benefits at the
same time that the pension plans are reviewed, or holding the
postretirement benefits review at a separate time in order to focus
appropriate attention on these benefits.
Recommendation 2: Expand the information provided to Congress during
its annual budget deliberations to include, for example, other
postretirement benefit costs by site, program office, and
appropriation account, as well as a discussion of factors that affect
these contractor benefit costs and DOE's plans for managing these
costs in coming years.
DOE Comment: The DOE agrees with this recommendation and will prepare
an additional section of the annual budget request to include other
postretirement benefits costs by program office. This section of the
budget request will also include a discussion of factors that affect
these contractor benefit costs, and the DOE's plans for managing these
costs in the coming years beginning with the Fiscal Year 2013 Budget
Request.
Recommendation 3: Issue guidance to program offices overseeing
contractors with defined benefit plans that defines criteria to be
considered when evaluating contractor requests to contribute more than
the minimum to their pension plans.
DOE Comment: The DOE does not agree that more stringent guidance
regarding the use of additional funds is needed. Each program office
is best suited for determining whether additional contributions are
the best use of funds in a given year based on the identified mission
work for the year, the program office's budget, the plan participant
impacts, the amount of the request, the contractor's rationale for
additional funding, and the opportunity cost associated with the
additional funds.
The GAO report finds as evidence that more guidance is required due to
the fact that the National Nuclear Security Administration (NNSA) and
the Office of Science (Science) approved additional funds for the
pension plans in fiscal year 2010 while the Office of Environmental
Management (EM) did not. Although the respective program offices
provided different reasons for approving or denying a request for
additional funds, making those additional contributions was the best
use of funds given the needs of the specific program office.
EM management compared the amount of the contractor's request to
prevent the plan restrictions with the number of plan participants
potentially affected by the restrictions (as well as the magnitude of
the impact on those individuals) and concluded that the amount of
funding required per participant would not be a cost-effective use of
DOE funds.
Given the economic conditions and the unemployment rates at the time,
EM decided it was more prudent to apply the funds above the ERISA
minimum contribution reimbursement to mission work rather than to the
defined benefit pension plan sponsored by an EM contractor. Had EM
funded the reimbursement of the pension at the level necessary to
avoid plan restrictions, EM contractors would potentially have had to
lay off existing employees.
Although DOE prefers to maintain flexibility to deal with situations
such as the above on a case by case basis, and thus does not wish to
establish stringent guidelines, DOE does agree that documenting the
current process the program offices use to reach the decisions would
be helpful and will continue to document the basis for the decisions
made. The DOE will have such documentation in place before the next
contribution review cycle.
Recommendation 4: Clarify existing guidance on correcting contractor
benefit packages that exceed DOE's standard by:
* Establishing a defined timeline by when contractors must submit
corrective action plans to their DOE contracting officer if the value
of their benefit package is determined to exceed DOE's standard, as
well as a timeline for when DOE contracting officers must reach a
decision on such plans;
* Developing criteria for contracting officers to use when deciding
whether to waive a required corrective action plan.
DOE Comment: The DOE agrees with this recommendation and will issue
guidance to the Field Offices that establishes a defined timeline for
the submission of a corrective action plan when the value of the
contractor's benefit package exceeds DOE's standard. The guidance will
also include criteria for contracting officers to use when deciding
whether to waive a required corrective action plan and when
contracting officers will be required to seek Headquarters approval.
[End of section]
Appendix II: Status of DOE Contractor Defined Benefit Plans:
The number of current Department of Energy (DOE) contractor defined
benefit plans open to new entrants has been dropping over the last
decade, particularly since 2005, while the number of frozen plans has
increased.[Footnote 61] Of the 40 tax-qualified defined benefit plans
currently sponsored by DOE contractors, only 1 was frozen as of 2000
(see figure 4). By 2006, about one-fourth (9) of currently sponsored
tax-qualified DOE contractor defined benefit plans were frozen in some
way. By 2010, of the 40 tax-qualified defined benefit plans sponsored
by DOE contractors, 21 were frozen in some way, and 19 plans were open
to new entrants. This trend in plan freezes over time is similar to
the trend discussed in another report, which found that, among
currently frozen plans nationwide, half of plan freezes were
implemented after 2005.[Footnote 62]
Figure 4: Freeze Status of Current DOE Contractor, Tax-Qualified
Defined Benefit Plans: Cumulative Number of Freezes by Initial Year of
Freeze:
[Refer to PDF for image: stacked vertical bar graph]
Number of plans[A]:
Year: 1998;
Soft freeze: 0;
Other freeze (includes site closure or hard freeze): 1.
Year: 1999;
Soft freeze: 0;
Other freeze (includes site closure or hard freeze): 1.
Year: 2000;
Soft freeze: 0;
Other freeze (includes site closure or hard freeze): 1.
Year: 2001;
Soft freeze: 1;
Other freeze (includes site closure or hard freeze): 1.
Year: 2002;
Soft freeze: 2;
Other freeze (includes site closure or hard freeze): 1.
Year: 2003;
Soft freeze: 2;
Other freeze (includes site closure or hard freeze): 1.
Year: 2004;
Soft freeze: 2;
Other freeze (includes site closure or hard freeze): 1.
Year: 2005;
Soft freeze: 3;
Other freeze (includes site closure or hard freeze): 2.
Year: 2006;
Soft freeze: 6;
Other freeze (includes site closure or hard freeze): 3.
Year: 2007;
Soft freeze: 11;
Other freeze (includes site closure or hard freeze): 5.
Year: 2008;
Soft freeze: 13;
Other freeze (includes site closure or hard freeze): 5.
Year: 2009;
Soft freeze: 16;
Other freeze (includes site closure or hard freeze): 5.
Year: 2010;
Soft freeze: 16;
Other freeze (includes site closure or hard freeze): 5.
Source: GAO analysis of DOE data.
Note: Graph is based on DOE accounting and actuarial data as of
September 30, 2010. Plans are listed cumulatively according to their
currently described freeze. If DOE indicated a current freeze, we
reviewed plan documents or conferred with DOE to find the initial date
of the freeze. Thus, we do not track freezes among plans that
terminated before 2010, and we do not indicate if the initial freeze
was different from the current freeze. A soft freeze is a type of
freeze that may reduce future benefit accruals for some or all active
participants. Closing the plan to new entrants is common among DOE
contractor plans. A hard freeze is a freeze under which future benefit
accruals cease for active participants. A site closure is effectively
like a hard freeze because the plan no longer has any active
participants. All of the freezes in this ’other“ category were site
closures and not hard freezes. Two of the ’plans“ that we refer to as
qualified plans are actually defined contribution plans that contain
separate, defined benefit components. In the case of these components,
the benefits are funded (and reimbursed by DOE) as if they were a
single-employer defined benefit plan and thus, as a naming convention,
we use the term defined benefit plan to refer only to this unique
component of the larger plans.
[A] Total number of plans = 40 in 2010, varied in previous years.
[End of figure]
[End of section]
Appendix II: Investment Allocation of DOE Contractors' Defined Benefit
Plans:
Table 3 shows the investment allocations of each DOE contractor tax-
qualified defined benefit plan by percentage and dollar values as of
September 30, 2010. As noted in the report, contractors--not DOE--are
responsible for selecting strategies used to invest pension plan
assets. Each tax-qualified, DOE contractor defined benefit plan is
unique in its investment allocations. For example, certain plans have
as much as 73 percent of plan assets invested in equities, whereas a
few plans have no equity investment. The overall mix of assets across
DOE contractor plans is 58 percent equities, 33 percent bonds, and 9
percent other assets (see last row of table 3).[Footnote 3] An asset
allocation of 60 percent equities and 40 percent bonds is often
considered a "typical" asset allocation for many defined benefit plans.
Table 3: DOE Contractor Tax-Qualified Defined Benefit Pension Plan
Asset Allocations, in Percentages and in Dollars, Ranked by Dollar
Amount of Assets in Equities as of September 30, 2010:
Plan Number: 1;
Responsible Program Office[A]: NNSA;
Percentage of assets in equities: 69%;
Percentage of assets in fixed income: 31%;
Percentage of assets in other assets: 0%;
Dollar value of equities assets: $1.982 billion;
Dollar value of fixed income assets: $890 million;
Dollar value of other assets: 0.
Plan Number: 2;
Responsible Program Office[A]: NNSA;
Percentage of assets in equities: 57%;
Percentage of assets in fixed income: 25%;
Percentage of assets in other assets: 18%;
Dollar value of equities assets: $1.513 billion;
Dollar value of fixed income assets: $664 million;
Dollar value of other assets: $478 million.
Plan Number: 3;
Responsible Program Office[A]: NNSA;
Percentage of assets in equities: 57%;
Percentage of assets in fixed income: 25%;
Percentage of assets in other assets: 18%;
Dollar value of equities assets: $1.401 billion;
Dollar value of fixed income assets: $615 million;
Dollar value of other assets: $443 million.
Plan Number: 4;
Responsible Program Office[A]: Environmental Management;
Percentage of assets in equities: 59%;
Percentage of assets in fixed income: 35%;
Percentage of assets in other assets: 6%;
Dollar value of equities assets: $966 million;
Dollar value of fixed income assets: $573 million;
Dollar value of other assets: $98 million.
Plan Number: 5;
Responsible Program Office[A]: NNSA;
Percentage of assets in equities: 56%;
Percentage of assets in fixed income: 44%;
Percentage of assets in other assets: 0;
Dollar value of equities assets: $963 million;
Dollar value of fixed income assets: $756 million;
Dollar value of other assets: 0.
Plan Number: 6;
Responsible Program Office[A]: Science;
Percentage of assets in equities: 57%;
Percentage of assets in fixed income: 25%;
Percentage of assets in other assets: 18%;
Dollar value of equities assets: $874 million;
Dollar value of fixed income assets: $383 million;
Dollar value of other assets: $276 million.
Plan Number: 7;
Responsible Program Office[A]: NNSA;
Percentage of assets in equities: 59%;
Percentage of assets in fixed income: 28%;
Percentage of assets in other assets: 13%;
Dollar value of equities assets: $862 million;
Dollar value of fixed income assets: $409 million;
Dollar value of other assets: $190 million.
Plan Number: 8;
Responsible Program Office[A]: NNSA;
Percentage of assets in equities: 47%;
Percentage of assets in fixed income: 53%;
Percentage of assets in other assets: 0;
Dollar value of equities assets: $806 million;
Dollar value of fixed income assets: $908 million;
Dollar value of other assets: 0.
Plan Number: 9;
Responsible Program Office[A]: Science;
Percentage of assets in equities: 61%;
Percentage of assets in fixed income: 27%;
Percentage of assets in other assets: 12%;
Dollar value of equities assets: $725 million;
Dollar value of fixed income assets: $321 million;
Dollar value of other assets: $143 million.
Plan Number: 10;
Responsible Program Office[A]: Environmental Management;
Percentage of assets in equities: 58%;
Percentage of assets in fixed income: 38%;
Percentage of assets in other assets: 4%;
Dollar value of equities assets: $539 million;
Dollar value of fixed income assets: $354 million;
Dollar value of other assets: $37 million.
Plan Number: 11;
Responsible Program Office[A]: Other;
Percentage of assets in equities: 56%;
Percentage of assets in fixed income: 38%;
Percentage of assets in other assets: 6%;
Dollar value of equities assets: $489 million;
Dollar value of fixed income assets: $331 million;
Dollar value of other assets: $52 million.
Plan Number: 12;
Responsible Program Office[A]: Science;
Percentage of assets in equities: 63%;
Percentage of assets in fixed income: 32%;
Percentage of assets in other assets: 5%;
Dollar value of equities assets: $436 million;
Dollar value of fixed income assets: $221 million;
Dollar value of other assets: $35 million.
Plan Number: 13;
Responsible Program Office[A]: NNSA;
Percentage of assets in equities: 57%;
Percentage of assets in fixed income: 25%;
Percentage of assets in other assets: 18%;
Dollar value of equities assets: $280 million;
Dollar value of fixed income assets: $123 million;
Dollar value of other assets: $88 million.
Plan Number: 14;
Responsible Program Office[A]: NNSA;
Percentage of assets in equities: 71%;
Percentage of assets in fixed income: 29%;
Percentage of assets in other assets: 0;
Dollar value of equities assets: $255 million;
Dollar value of fixed income assets: $105 million;
Dollar value of other assets: 0.
Plan Number: 15;
Responsible Program Office[A]: NNSA;
Percentage of assets in equities: 60%;
Percentage of assets in fixed income: 3%;
Percentage of assets in other assets: 37%;
Dollar value of equities assets: $184 million;
Dollar value of fixed income assets: $9 million;
Dollar value of other assets: $114 million.
Plan Number: 16;
Responsible Program Office[A]: NNSA;
Percentage of assets in equities: 64%;
Percentage of assets in fixed income: 36%;
Percentage of assets in other assets: 0;
Dollar value of equities assets: $165 million;
Dollar value of fixed income assets: $93 million;
Dollar value of other assets: 0.
Plan Number: 17;
Responsible Program Office[A]: NNSA;
Percentage of assets in equities: 56%;
Percentage of assets in fixed income: 1%;
Percentage of assets in other assets: 43%;
Dollar value of equities assets: $153 million;
Dollar value of fixed income assets: $3 million;
Dollar value of other assets: $117 million.
Plan Number: 18;
Responsible Program Office[A]: Environmental Management;
Percentage of assets in equities: 60%;
Percentage of assets in fixed income: 35%;
Percentage of assets in other assets: 5%;
Dollar value of equities assets: $146 million;
Dollar value of fixed income assets: $85 million;
Dollar value of other assets: $12 million.
Plan Number: 19;
Responsible Program Office[A]: NNSA;
Percentage of assets in equities: 57%;
Percentage of assets in fixed income: 25%;
Percentage of assets in other assets: 18%;
Dollar value of equities assets: $124 million;
Dollar value of fixed income assets: $54 million;
Dollar value of other assets: $39 million.
Plan Number: 20;
Responsible Program Office[A]: Other;
Percentage of assets in equities: 23%;
Percentage of assets in fixed income: 71%;
Percentage of assets in other assets: 6%;
Dollar value of equities assets: $120 million;
Dollar value of fixed income assets: $372 million;
Dollar value of other assets: $31 million.
Plan Number: 21;
Responsible Program Office[A]: NNSA;
Percentage of assets in equities: 53%;
Percentage of assets in fixed income: 42%;
Percentage of assets in other assets: 5%;
Dollar value of equities assets: $98 million;
Dollar value of fixed income assets: $78 million;
Dollar value of other assets: $9 million.
Plan Number: 22;
Responsible Program Office[A]: Other;
Percentage of assets in equities: 70%;
Percentage of assets in fixed income: 28%;
Percentage of assets in other assets: 2%;
Dollar value of equities assets: $84 million;
Dollar value of fixed income assets: $33 million;
Dollar value of other assets: $2 million.
Plan Number: 23;
Responsible Program Office[A]: NNSA;
Percentage of assets in equities: 46%;
Percentage of assets in fixed income: 50%;
Percentage of assets in other assets: 4%;
Dollar value of equities assets: $45 million;
Dollar value of fixed income assets: $49 million;
Dollar value of other assets: $4 million.
Plan Number: 24;
Responsible Program Office[A]: Environmental Management;
Percentage of assets in equities: 66%;
Percentage of assets in fixed income: 34%;
Percentage of assets in other assets: 0;
Dollar value of equities assets: $42 million;
Dollar value of fixed income assets: $22 million;
Dollar value of other assets: 0.
Plan Number: 25;
Responsible Program Office[A]: NNSA;
Percentage of assets in equities: 60%;
Percentage of assets in fixed income: 40%;
Percentage of assets in other assets: 0;
Dollar value of equities assets: $41 million;
Dollar value of fixed income assets: $27 million;
Dollar value of other assets: 0.
Plan Number: 26;
Responsible Program Office[A]: Environmental Management;
Percentage of assets in equities: 66%;
Percentage of assets in fixed income: 34%;
Percentage of assets in other assets: 0;
Dollar value of equities assets: $41 million;
Dollar value of fixed income assets: $22 million;
Dollar value of other assets: 0.
Plan Number: 27;
Responsible Program Office[A]: Other;
Percentage of assets in equities: 18%;
Percentage of assets in fixed income: 82%;
Percentage of assets in other assets: 0;
Dollar value of equities assets: $22 million;
Dollar value of fixed income assets: $98 million;
Dollar value of other assets: 0.
Plan Number: 28;
Responsible Program Office[A]: NNSA;
Percentage of assets in equities: 60%;
Percentage of assets in fixed income: 35%;
Percentage of assets in other assets: 5%;
Dollar value of equities assets: $22 million;
Dollar value of fixed income assets: $13 million;
Dollar value of other assets: $2 million.
Plan Number: 29;
Responsible Program Office[A]: NNSA;
Percentage of assets in equities: 59%;
Percentage of assets in fixed income: 4%;
Percentage of assets in other assets: 37%;
Dollar value of equities assets: $22 million;
Dollar value of fixed income assets: $1 million;
Dollar value of other assets: $13 million.
Plan Number: 30;
Responsible Program Office[A]: Other;
Percentage of assets in equities: 25%;
Percentage of assets in fixed income: 67%;
Percentage of assets in other assets: 8%;
Dollar value of equities assets: $20 million;
Dollar value of fixed income assets: $53 million;
Dollar value of other assets: $6 million.
Plan Number: 31;
Responsible Program Office[A]: NNSA;
Percentage of assets in equities: 60%;
Percentage of assets in fixed income: 40%;
Percentage of assets in other assets: 0;
Dollar value of equities assets: $15 million;
Dollar value of fixed income assets: $9 million;
Dollar value of other assets: 0.
Plan Number: 32;
Responsible Program Office[A]: NNSA;
Percentage of assets in equities: 64%;
Percentage of assets in fixed income: 36%;
Percentage of assets in other assets: 0;
Dollar value of equities assets: $11 million;
Dollar value of fixed income assets: $6 million;
Dollar value of other assets: 0.
Plan Number: 33;
Responsible Program Office[A]: Other;
Percentage of assets in equities: 73%;
Percentage of assets in fixed income: 27%;
Percentage of assets in other assets: 0;
Dollar value of equities assets: $9 million;
Dollar value of fixed income assets: $3 million;
Dollar value of other assets: 0.
Plan Number: 34;
Responsible Program Office[A]: Other;
Percentage of assets in equities: 24%;
Percentage of assets in fixed income: 69%;
Percentage of assets in other assets: 7%;
Dollar value of equities assets: $7 million;
Dollar value of fixed income assets: $21 million;
Dollar value of other assets: $2 million.
Plan Number: 35;
Responsible Program Office[A]: Environmental Management;
Percentage of assets in equities: 50%;
Percentage of assets in fixed income: 46%;
Percentage of assets in other assets: 4%;
Dollar value of equities assets: $6 million;
Dollar value of fixed income assets: $6 million;
Dollar value of other assets: 0.
Plan Number: 36;
Responsible Program Office[A]: Environmental Management;
Percentage of assets in equities: 48%;
Percentage of assets in fixed income: 30%;
Percentage of assets in other assets: 22%;
Dollar value of equities assets: $2 million;
Dollar value of fixed income assets: $1 million;
Dollar value of other assets: $1 million.
Plan Number: 37;
Responsible Program Office[A]: Other;
Percentage of assets in equities: 0%;
Percentage of assets in fixed income: 100%;
Percentage of assets in other assets: 0;
Dollar value of equities assets: 0;
Dollar value of fixed income assets: $43 million;
Dollar value of other assets: 0.
Plan Number: 38;
Responsible Program Office[A]: Science;
Percentage of assets in equities: 0%;
Percentage of assets in fixed income: 100%;
Percentage of assets in other assets: 0;
Dollar value of equities assets: 0;
Dollar value of fixed income assets: less than $0.1 million;
Dollar value of other assets: 0.
Plan Number: 39;
Responsible Program Office[A]: Science;
Percentage of assets in equities: 0%;
Percentage of assets in fixed income: 100%;
Percentage of assets in other assets: 0;
Dollar value of equities assets: 0;
Dollar value of fixed income assets: less than $0.1 million;
Dollar value of other assets: 0.
Plan Number: 40;
Responsible Program Office[A]: Science;
Percentage of assets in equities: -44%[B];
Percentage of assets in fixed income: -56%[B];
Percentage of assets in other assets: 0;
Dollar value of equities assets: -$17 million[B];
Dollar value of fixed income assets: -$22 million[B];
Dollar value of other assets: 0.
Portfolio across all DOE contractor tax-qualified defined benefit
plans:
Percentage of assets in equities: 58%;
Percentage of assets in fixed income: 33%;
Percentage of assets in other assets: 9%;
Dollar value of equities assets: $13.453 billion;
Dollar value of fixed income assets: $7.732 billion;
Dollar value of other assets: $2.192 billion.
Source: GAO analysis of DOE data.
Note: Table is based on DOE accounting and actuarial data as of
September 30, 2010. The names of these plans have been removed because
DOE believes that the plans' asset allocations may be proprietary. The
plan numbers in this table do not necessarily correspond to the same
plans as numbered in Figure 1 of this report. Two of the "plans" that
we refer to as qualified plans are actually defined contribution plans
that contain separate, defined benefit components. In the case of these
two components, the benefits are funded (and reimbursed by DOE) as if
they were a single-employer defined benefit plan and thus, as a naming
convention, we use the term defined benefit plan to refer only to this
unique component of the larger plans.
[A] Other = Office of Civilian Radioactive Waste Management, Office of
Energy Efficiency and Renewable Energy, Office of Legacy Management, or
Office of Nuclear Energy.
[B] Negative asset values are reported because more plan benefit
payments have been made than contributions on behalf of the contractor
plan. Thus, these values represent an amount payable by DOE upon
closing of the contract.
[End of table]
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
Mark E. Gaffigan, (202) 512-3841 or gaffiganm@gao.gov:
Staff Acknowledgments:
Other key contributors to this report were Kimberley M. Granger and
Diane G. LoFaro, Assistant Directors; Charles Ford; David Marroni; Ken
Stockbridge; Fatema Wachob; and Marie Webb. Important contributions
were also made by Joseph A. Applebaum, Ellen W. Chu, Charles Jeszeck,
Mehrzad Nadji, Robert Owens, Cheryl Peterson, Anne Rhodes-Kline,
Christopher Ross, Cynthia Saunders, Kiki Theodoropoulos, Roger Thomas,
Frank Todisco, Craig Winslow, Melissa Wolf, and William Woods.
[End of section]
Footnotes:
[1] Employee pension benefits can include, among others, participation
in defined benefit and defined contribution plans. In this report, we
use the term ’pension benefits“ to refer to benefits provided by
defined benefit plans unless specifically noted. We focus on defined
benefit plans because DOE‘s reimbursement costs for those plans have
significantly increased since 2008. For information on the differences
between defined benefit and defined contribution plans, see GAO,
Answers to Key Questions about Private Pension Plans, [hyperlink,
http://www.gao.gov/products/GAO-02-745SP] (Washington, D.C.: Sept. 18,
2002).
[2] GAO, Department of Energy: Certain Postretirement Benefits for
Contractor Employees Are Unfunded and Program Oversight Could be
Improved, [hyperlink, http://www.gao.gov/products/GAO-04-539]
(Washington, D.C.: Apr. 15, 2004). As of March 2011, we classified one
of these four recommendations as having been implemented,
specifically, our recommendation that the department extend, to the
degree practical, the requirements for contractors to regularly assess
the value of their benefit packages.
[3] GAO, Department of Energy: Additional Opportunities Exist for
Reducing Laboratory Contractors‘ Support Costs, [hyperlink,
http://www.gao.gov/products/GAO-05-897] (Washington, D.C.: Sept. 9,
2005).
[4] GAO, Department of Energy: Information on Its Management of Costs
and Liabilities for Contractors‘ Pension and Postretirement Benefit
Plans, [hyperlink, http://www.gao.gov/products/GAO-08-642R]
(Washington, D.C.: June 19, 2008).
[5] NNSA was established in 2000 as a separately organized agency
within DOE. It is responsible for the nation‘s nuclear weapons,
nonproliferation, and naval reactors programs. 50 U.S.C. § 2401.
[6] For purposes of describing DOE contractor pension liabilities in a
consistent format, we use the ’projected benefit obligation,“ which is
a liability measure that projects pension benefit obligations in
accordance with U.S. generally accepted accounting principles.
Projected benefit obligations reflect, as of a given date, the
actuarial present value of all benefits attributed by the plan‘s
benefit formula to employee service rendered before that date and are
measured using assumptions that include future compensation levels if
the pension benefit formula is based on those future compensation
levels. Plan assets are usually stocks, bonds, and other investments
that have been segregated and restructured (usually in a trust) to
provide for pension benefits. The amount of plan assets includes both
employer and employee contributions and amounts earned from investing
the contributions, minus benefits paid. For other postretirement
benefits, the counterpart to the projected benefit obligation is the ’
accumulated projected benefit obligation.“ Contractors use certain
assumptions when calculating the amounts to be incorporated into DOE‘s
financial statements on other postretirement benefits. These
assumptions include medical and dental trend rates, discount rates,
and mortality assumptions.
[7] A defined benefit plan is typically financed by the employer in
the private sector and by the employer and employees in the public
sector (with the employees‘ cost fixed and the employer bearing most
of the risk of variations in contribution level). Defined benefit
plans typically provide retirement benefits in the form of an annuity
that provides a guaranteed monthly payment for life, the value of
which is often determined by a formula, usually based on years of
service and often based on salary as well. A defined contribution plan
is financed by employee or employer contributions, or both, into
individual accounts set up for each participant. Most defined
contribution plans allow participants to direct these contributions to
mutual funds and other financial market investments to accumulate
pension benefits, dependent on net investment returns, which will then
be withdrawn during retirement.
[8] A qualified pension plan is a retirement plan that satisfies
certain requirements set forth in the Internal Revenue Code of 1986.
26 U.S.C. § 401. Qualified pension plans are afforded favorable tax
treatment in several ways. For example, amounts that the employer
contributes to the plan are tax deductible (within limits) in the year
contributions are made, and earnings on the investment of plan assets
are tax deferred. Two of the ’plans“ that we refer to as qualified
plans are actually defined contribution plans that contain separate
defined benefit components. In the case of these two components, the
benefits are funded (and reimbursed by DOE) as if they were a single-
employer defined benefit plan; thus, as a naming convention, we use
the term ’defined benefit plan“ to refer only to this unique component
of the larger plans. A nonqualified pension plan is a plan that does
not meet the applicable requirements for tax qualification under the
Internal Revenue Code. Nonqualified plans are generally not meant to
cover the broad spectrum of employees that a qualified plan covers and
are typically designed for highly compensated employees or select
company executives.
[9] A private-sector plan can be a single-employer plan, a
multiemployer plan, or a multiple-employer plan. A single-employer
plan is one established and maintained by only one employer. Such
plans can be established unilaterally by the sponsor or through a
collective bargaining agreement with a labor union. Generally, the
sponsoring employer has the ultimate responsibility for administering
the plan. A multiemployer plan is a collectively bargained agreement
between a labor union and a group of employers in a particular trade
or industry. Multiemployer plans typically cover groups of workers in
the unionized sector of such industries as trucking, building and
construction, clothing and textiles, and food and commercial workers,
among others. Management and labor representatives must jointly govern
these plans, in which participants can negotiate the plan benefits
through a union. A multiple-employer plan is maintained by more than
one employer and is typically established without collective
bargaining agreements. A public-sector plan, referred to in statute as
a governmental plan (29 U.S.C. § 1002(32)), is one that is offered by
governmental employers to their employees, such as the University of
California retirement plan.
[10] Pub. L. No. 93-406, 88 Stat. 829 (codified as amended at 29
U.S.C. §§ 1001-1461).
[11] In contrast, public-sector plans are not covered by most
requirements under ERISA, including those with respect to plan
funding. To receive preferential tax treatment, however, state and
local pensions must comply with requirements of the Internal Revenue
Code.
[12] Under DOE‘s policy, contractor contributions to qualified defined
benefit plans are reimbursed on the basis of minimum funding
requirements set by ERISA and the Internal Revenue Code. These
contributions can vary above and below the true long-term cost of the
plan and do not necessarily reflect the cost of benefits earned in a
particular year. For nonqualified pension benefits and for other
postretirement benefits, the pay-as-you-go reimbursements are made
after the period over which the benefits were earned. In general,
DOE‘s reimbursements are based on the contractor‘s cash flow and are
not on an accrual basis that would match costs to services received.
[13] In addition, some contractors are contractually required to
conduct both benefit value and cost studies.
[14] The 12 plans also account for most DOE contractor pension plan
assets, participants, and underfunding.
[15] According to DOE officials, while contractors determine the
benefit plans offered to employees and the plans‘ design, the
department currently incorporates language in recompeted contracts
that requires DOE approval for any nonstatutory pension plan changes
that may increase costs or liabilities. In addition, the contract
language asserts that no presumption of allowability will exist when a
contractor implements a new benefit plan or makes changes to existing
benefit plans until the department makes a determination of cost
allowability.
[16] According to DOE documents, the determination of what constitutes
an allowable cost for reimbursement of contractor employee benefits is
based on numerous factors, including (1) cost provisions in the
Federal Acquisition Regulation (FAR) and the Department of Energy
Acquisition Regulation, (2) contract requirements, (3) collective
bargaining agreements between contractors and their employees
represented by unions, and (4) policy requirements. Following FAR cost
principles, consideration of whether compensation costs incurred under
a government contract with a commercial organization are allowable
includes whether they are, among other things, reasonable, allocable,
and compliant with applicable standards and terms of the contract. 48
C.F.R. § 31.201-2 (2009). A cost is reasonable if, in its nature and
amount, it does not exceed that which would be incurred by a prudent
person in the conduct of competitive business. 48 C.F.R. § 31.201-3
(2009).
[17] DOE Order 350.1 provides that DOE must approve contractor benefit
plans and proposed changes to those plans for reimbursement purposes.
[18] Incumbent employees”employees hired before August 1, 2008”as well
as new hires employed on or after that date at the Savannah River Site
are eligible to participate in the Savings and Investment Plan, a
401(k) defined contribution plan. But the plan policy for contractor
matching of employee contributions varies depending on whether the
participant is an incumbent employee or new hire. Specifically, for
incumbent employees, the contractor will match 50 cents on every 1
dollar the employee saves in the plan, up to 6 percent. For new hires,
the contractor will also match 50 cents on every 1 dollar, but up to 8
percent, and also provides a nonelective contribution of 5 percent of
compensation.
[19] ERISA protects pension benefits already earned based on service,
compensation, or other relevant factors to date, but plan sponsors can
alter or eliminate future benefit accruals.
[20] Some contractors have collective bargaining agreements that
require them to negotiate any changes to their benefit plans with
employees, though some collective bargaining agreements do not affect
what specific benefits contractors can offer.
[21] Appendix II shows some of the changes contractors have made to
their plans in recent years.
[22] If the ’full“ benefit premium charged to retirees is the same
rate charged to younger, active employees, then the postretirement
benefits are actuarially subsidized, and a postretirement liability is
supposed to exist.
[23] Private-sector contractors are subject to ERISA, which
establishes four standards of conduct for a fiduciary, including (1) a
duty of loyalty, (2) a duty of prudence, (3) a duty to diversify
investments, and (4) a duty to follow plan documents to the extent
that they comply with ERISA. 29 U.S.C. § 1104(a)(1).
[24] Appendix III provides information on how DOE contractor plans
invest their assets. The asset-weighted allocation average of assets
(i.e., weighted by assets aggregated over all plans) for DOE
contractors‘ defined benefit plans is 58 percent equities, 33 percent
fixed income (bonds), and 9 percent other assets.
[25] Alternatively, increases in the fair market value of a defined
benefit pension‘s assets increase the funded status of pension
benefits.
[26] ERISA, as amended, sets funding standards for determining the
minimum contributions that private-sector plan sponsors must make each
year to tax-qualified plans; these standards are based on a target
objective of a fully funded plan. 29 U.S.C. § 1082. A fully funded
plan is one in which the assets held in the pension trust are
sufficient to pay the benefits that plan participants have earned. The
employer generally bears the investment risk for the assets held by
the plan. If the assets decrease in value, the plan sponsor may be
required to make additional contributions to the pension fund. Under
the Pension Protection Act of 2006, any shortfall of plan assets
compared with plan liabilities must be amortized over 7 years, absent
any legislative relief. 26 U.S.C. § 430(c).
[27] A large majority of DOE contractor pension plans are subject to
ERISA‘s private-sector pension requirements, specifically,
requirements applicable to single-employer plans, which govern plan
funding and ultimately contributions. Two plans are subject to ERISA‘s
private-sector pension requirements applicable to multiemployer plans.
But although DOE contractors have only three plans that are public-
sector plans”each related to the University of California Retirement
Plan”those three plans represent nearly 30 percent of DOE‘s contractor
pension liabilities. Public-sector plans are not covered by Title 1 of
ERISA because they are ’governmental plans“ specifically excluded from
such coverage. 29 U.S.C. § 1003(b)(1). In addition, federal law
generally does not require state and local governments to prefund or
report on the funding status of their pension plans, although they are
governed by state and local laws that may provide for plan funding.
For a more detailed discussion of overall state and local retirement
benefit funding, see GAO, State and Local Government Retiree Benefits:
Current Funded Status of Pension and Health Benefits, GAO-08-223
(Washington, D.C.: Jan. 29, 2008).
[28] Pension Protection Act of 2006, Pub L. No. 109-280, § 106, 120
Stat. 780, 817-18. The sponsoring contractors of these three plans
have been eligible for a special government contractor provision that
allows the plan to discount the actuarial value of plan liabilities in
such a way that, all else equal, reduces plan liabilities relative to
certain other private-sector plans. To be eligible for this special
rule, a plan must be a private-sector plan maintained by a corporation
whose primary source of revenue is derived from business with the U.S.
government and is subject to federal and defense acquisition
regulations. Revenues from such business must exceed $5 billion and
pension plan costs must be assignable to a particular accounting
standard. With respect to funding, this provision allowed eligible
contractors to measure liabilities using an alternative rate for plans
years beginning after December 31, 2007, and potentially extending
through January 1, 2011.
[29] The various sets of funding requirements use differing methods
and actuarial assumptions to determine funding and required
contributions, which can vary across plans and over time.
[30] The Internal Revenue Code specifies requirements for a retirement
plan to be considered ’qualified“ and receive preferential tax
treatment. 26 U.S.C. § 401. In a qualified plan (1) the employer can
deduct from income the amount that it contributes to the plan as a
business expense, (2) the amount the employer contributes on plan
participants‘ behalf is not treated as income to the participants
until distributed, and (3) the investment earnings of a qualified
pension trust are not taxed as income to the employer nor to plan
participants until distributed. 26 U.S.C. §§ 162, 404 and 501(a). A
qualified retirement plan may be either a defined benefit plan or a
defined contribution plan.
[31] For example, in accordance with the Internal Revenue Code, if a
single-employer pension plan‘s funding level falls below certain
specified thresholds, then certain restrictions may be placed on the
benefits provided by the plan, such as lump-sum payments. 26 U.S.C. §
436(d).
[32] Credit balances can be earned when a plan sponsor contributes
more to its pension plans than required. Under certain conditions,
sponsors can use these balances to offset required contributions until
the balances are exhausted.
[33] The interest rate assumption is a key assumption used to
determine the present value of plan liabilities. All else equal, a
lower interest rate has the effect of increasing the present value of
plan liabilities. Present-value calculations reflect the time value of
money”that a dollar in the future is worth less than a dollar today,
because the dollar today can be invested and earn interest. Thus,
using a lower interest rate will increase the present value of a
stream of payments, which implies that a higher level of assets today
will be needed to fund those future payments.
[34] The effect of the economic environment on pension assets is not
unique to DOE; in general, contribution obligations for pension plans
sharply increased after 2008 as a result of the economic downturn.
Because of the economic downturn, the average pension funded ratio
(the ratio of plan assets to plan obligations) by the 100 largest
corporate defined benefit plans has been less than 100 percent since
July 2008 and was less than 80 percent as of May 2010.
[35] As of 2009, Oak Ridge National Laboratory‘s defined benefit plan
had approximately 9,800 participants.
[36] According to DOE officials, projections of future pension plan
contributions are made 18 months in advance of when the actual
contributions will be known. These projections are highly sensitive to
underlying data, methods, and assumptions, and actual actuarial
valuations may yield different contribution levels. This situation
further complicates the department‘s ability to accurately forecast
the costs of pension contributions in its budget requests.
[37] Typically, DOE contractors pay for other postretirement benefits
on a pay-as-you go basis. In turn, DOE reimburses contractors for the
amount needed to meet the contractor‘s annual share of these costs.
From fiscal year 1997 to fiscal year 2007, the net funded status of
contractors‘ other postretirement benefits generally declined from an
underfunding of $5.0 billion to $10.3 billion. These benefit
obligations will represent an ongoing liability to DOE because, in
contrast to defined benefit pensions, these benefits are generally not
funded in advance of being paid.
[38] Pub. L. No. 109-280, 120 Stat. 780.
[39] Some analyses had identified weaknesses in the funding rules
before passage of the Pension Protection Act of 2006. We previously
reported on such weaknesses in the funding rules, finding that, over
the 1995 to 2002 period that was studied, a majority of sponsors of
the 100 largest defined benefit plans each year, on average, made no
cash contributions to their plans. See GAO, Private Pensions: Recent
Experiences of Large Defined Benefit Plans Illustrate Weaknesses in
Funding Rules, [hyperlink, http://www.gao.gov/products/GAO-05-294]
(Washington, D.C.: May 31, 2005).
[40] For example, the Worker, Retiree, and Employer Recovery Act of
2008 provided plan sponsors with temporary further relief from the
changes in the Pension Protection Act of 2006 (Pub. L. No. 110-458,
122 Stat. 5092), as did IRS guidance in 2009 concerning interest rates
that could be used to value plan liabilities in some cases. More
recently, the Preservation of Access to Care for Medicare
Beneficiaries and Pension Relief Act of 2010 provided relief to
private-sector pension sponsors, in part, by allowing certain sponsors
to elect one of two possible schedules to reduce or delay
contributions attributable to certain funding shortfalls stemming from
the economic downturn. Pub. L. No. 111-192, 124 Stat. 1280. During our
site visits, we asked DOE contractors if they planned to elect one of
the schedules, and some said they were considering doing so but had
not determined which, if any, of the schedules made the most sense for
their specific pension plan or overall budget situation.
[41] Pub. L. No. 111-148, 124 Stat. 119 (2010).
[42] According to department policy and guidance, DOE must approve the
comparable companies, of which the contractor must select no less than
15, for the benefit assessment. DOE guidance states that the group of
comparable companies must comprise the contractor‘s parent
organization, if applicable, and organizations in the same industries
from which the contractor competes for employees. Each company
selected for comparison must compete for nonexecutive staff in the
same industry as the contractor, or the contractor must document that
it gained or lost four or more nonexecutive staff to the company
during the prior 5 years who have the same skill sets as professional
staff of the company.
[43] DOE later requested public comment on how to address the
challenge posed by increasing costs and liabilities associated with
its contractor employee pension and medical benefits. 72 Fed. Reg.
14,266 (Mar. 27, 2007). In response, critics shared their concerns
that requiring defined contribution plans would actually increase
contractor expenses in the short term because of the age profile of
new hires. More specifically, they noted that new employees are
typically younger than the average employee in the workforce and that
while market-based defined contribution plans typically provide the
same contribution for all employees regardless of age, defined benefit
plans are, in part, a function of age, with younger employees costing
much less than older employees. Another public comment stated that
actual benefit costs would not decrease unless contractors established
defined contribution plans with benefits that were less generous than
those provided under their current defined benefit plans. Critics also
noted that, although it made sense to control costs by putting limits
on the level of plan costs or benefits, constraining the structure of
contractor plans (such as defined benefit versus defined contribution)
could have negative effects on a contractor‘s ability to effectively
manage its workforce.
[44] DOE currently defines a benefit package as market based if an
assessment shows that the value or cost of the package does not exceed
105 percent of the average value or cost of comparable companies‘
benefit packages.
[45] Those incumbent employees who chose the compensation package
including a defined contribution plan at the new contractor remain as
separated-vested participants in the former contractor‘s plan”the
University of California Los Alamos National Laboratory defined
benefit plan.
[46] According to DOE documents, in providing successor contractors
with flexibility to change incumbent employees‘ benefits, NNSA asks
contractors to develop a level of total compensation which, within
available funds, attracts, motivates, and retains a highly competent
workforce and maintains a competitive position in the applicable labor
markets. However, NNSA does not prescribe a particular method to
achieving efficiencies, nor does it express a preferred solution in
terms of approach or savings.
[47] The Pension Protection Act of 2006 established benefit
restrictions for private-sector single-employer plans that may occur
if a plan‘s funding level falls below certain specified thresholds. §
103, 120 Stat. 809-16 (codified as amended at 29 U.S.C. § 1056(g)). If
the funding level, based on the adjusted funding target attainment
percentage, falls below 80 percent, then certain restrictions may be
placed on the benefits provided by the plan, including limits on the
provision of lump-sum benefit payments. If funding falls below 60
percent, then additional restrictions may apply, including a
restriction on future benefit accruals and a prohibition on lump-sum
benefit payments. A somewhat similar concept based on funding
thresholds exists for private-sector multiemployer plans.
[48] GAO, Standards for Internal Control in the Federal Government,
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1]
(Washington, D.C.: November 1999).
[49] [hyperlink, http://www.gao.gov/products/GAO-04-539].
[50] Within its fiscal year 2011 budget request, DOE states that it
reimburses contractor contributions as a part of indirect costs”-those
not charged directly to a specific program-”and that budgetary line
items that include reimbursements assume an indirect rate anticipated
to be sufficient to meet the contributions.
[51] From September 1996 until November 2009, DOE‘s policy, as
reflected in DOE Order 350.1, was to reimburse contractors for their
pension plan contributions according to the minimum amount required by
ERISA. After November 2009, DOE changed its policy to reimburse
contractors for the contributions needed to keep pension plans funded
to at least 80 percent to avoid benefit restrictions. In February
2010, DOE formally changed its policy to reimburse contractors for the
minimum amount required by ERISA or more on a case-by-case basis. DOE
expected this latest change to significantly reduce its contractor
pension reimbursement costs in fiscal year 2010.
[52] In a January 2010 memo announcing this change, DOE explained
that, regardless of the minimum, it would reimburse contractors for
contributions necessary to keep their plans at least 60 percent funded
to avoid restrictions on future benefit accruals. In the same memo,
DOE noted that reimbursement of contractor contributions that exceed
the ERISA minimum will require DOE headquarters approval. DOE‘s
reimbursement policy addresses private-sector pension plans; it does
not specifically address public-sector plans.
[53] Holding pension contributions to the minimum may reduce DOE
reimbursement costs in the current year and allow additional funds to
be used for mission work but could result in higher minimum
contributions in other years. Contributions above the minimum, on the
other hand, may better address funding shortfalls and level annual
budget costs. With this trade-off in mind, a National Laboratory
Directors Council working group emphasized that a balanced approach is
needed and recommended, among other things, that DOE allow contractors
to contribute more than the minimum required. Also, DOE officials
stated that any requests to increase employer contributions must be
cost-effective and reduce future liabilities.
[54] DOE Order 350.1 requires contractors to assess the value of their
benefit packages every 3 years, though DOE requirements inserted into
some contracts require these assessments every 2 years.
[55] DOE officials stated that while the value study focuses on
companies in a similar industry, at times other companies are
included. In addition, the DOE contracting officer must approve the
list of comparable companies used in the value study.
[56] Rather than measure actual cost, the value study assigns a
theoretical cost on the basis of what is included in the benefit
package, which is then used to compare contractor benefits to one
another. By calculating the same dollar value of benefits based on the
same plan provisions, the value study eliminates random differences in
cost. For example, a contractor‘s value study score that is 105
signifies that the contractor‘s employees are actuarially projected to
receive 5 percent more benefits than comparable company employees. The
value study measures all benefits, including defined benefit and
defined contribution plans, matching savings plans, death and
disability benefits, preretirement and postretirement health care, and
time off with pay. It does not measure contractor salary compensation.
[57] The 20 benefit packages (of the 56 most recent value studies)
that exceeded DOE‘s standard are sponsored by 16 contractors.
[58] Four of the other 12 contractor benefit packages most recently
assessed as exceeding the 105 percent standard were not subject to
corrective action because, in most cases, the contractors sponsoring
those benefit packages provide corporate benefits subject to Office of
Management and Budget Circular A-21 for Educational Institutions. For
the other 8 contractor benefit packages, the requirement for
corrective actions had been waived by a DOE contracting officer.
[59] DOE‘s Office of Procurement and Assistance Management is
responsible for overseeing contractor human resource management issues
at non-NNSA sites, and NNSA‘s Office of Acquisition and Supply
Management is responsible for overseeing those issues at NNSA sites.
[60] For example, according to DOE data, a contracting officer waived
the corrective action plan requirement for a contractor whose value
study score was 112.1.
[61] A defined benefit plan freeze is a plan amendment that closes-”
but does not terminate”-the plan to new entrants and may limit future
benefit accruals for some or all active participants (i.e., current
employees) in the plan.
[62] GAO, Defined Benefit Pensions: Plan Freezes Affect Millions of
Participants and May Pose Retirement Income Challenges, [hyperlink,
http://www.gao.gov/products/GAO-08-817] (Washington, D.C.: July 21,
2008).
[End of section]
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