Friday, March 2, 2012

Pension Liabilities

A recent article in the Federal Times is sounding the alarm over the impact that the Pension Protection Act (PPA) of 2006 will have on federal budgets beginning in fiscal year 2013. The lead line states that the rule "...requires the U.S. government to reimburse its contractors to a far greater degree for their employee pension costs". In reality, this statement isn't exactly correct. The PPA (and the subsequent amendment to CAS) allows contractors to close the shortfall between pension liabilities and the amount of funds in pension trusts more quickly than was allowed under the old rules. The  Government has always been on the hook for these pension liabilities.

The article is accurate in stating that the impact of the rule changes to future budgets is unknown and could potentially be in the billions of dollars. The Lockheed's, Boeing's, and Northrop-Grumman's probably have not "crunched" their numbers yet and most certainly have not impacted forward pricing rates for the change in methodology. In fact, if these companies have a significant backlog of fixed priced effort, it is to their advantage to defer the impact as long as possible.

The article also focuses on the DoD and its contractors but the Department of Energy is the real elephant in the room with their huge operation and maintenance contracts at their various sites (Savannah River, Los Alamos, Richland, etc). For the past five decades or so, site support contractors have come and gone but the employees with their lucrative defined benefit pension plans have stayed, donning the hat of whatever contractor is brought in to manage them.

Expect to hear a lot about unfunded pension liabilities and their impact on Government budgets in the future.

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