Wednesday, January 23, 2013

Looming Crisis in Pension Plan Funding

According to a recent GAO study of the defined benefit pension plans at the 10 largest DoD contractors, pension costs have grown from $500 million to more than $5 billion over the course of the last decade. The GAO also warned that this explosive growth will continue for two reasons. First, since the 2008 market downturn, pension funds investments have not performed as well as initial projections which will require contractors to make additional contributions to make up the shortfall. Secondly, the Pension Plan Protection Act of 2006 (PPA) changed the funding requirements. Prior to PPA companies were required to fund current year liabilities as well as an additional amount required to amortize, over a 30 year period, past service liabilities. After PPA, the 30 year amortization period was lowered to seven years.

The PPA was incompatible with CAS (Cost Accounting Standards) and required the CAS Board to harmonize the CAS requirements with PPA. It took about four years to finalize the harmonization rules. The impact of the PPA on Government contracts will be felt beginning 2014. The DoD Comptroller was quoted last year saying that the impact to the Department "could be billions of dollars, conceivably".

DoD (and other Executive agencies) is understandably concerned about the impact of future pension plan costs on their programs. DoD will be stepping up its oversight on pension costs. It needs auditors and contracting officers that are better trained and equipped to deal with the intricacies of pension plan rules and regulations. As a starting point, DoD will focus on the following:

  • How contractors determine pension costs
  • Who within DoD ensures the contractor pension costs it pays are appropriate
  • How DoD contractor plans compare with the private sector
  • Understanding and assessing factors that contribute to increased costs
  • How the harmonization of CAS with PPA will affect the amounts DoD will pay in coming years.

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