DOE Funded Pension Plans - CAS vs ERISA

The Department of Energy (DOE) has oversight responsibility with respect to defined benefit pension plans sponsored by  DOE contractors under M&O contracts (management and operating contracts) and other facility management contracts (FMCs) where the work was once performed under M&O contracts. These contracts are characterized by successor contractors being required to employ all or part of the former contractor's workforce and to assume sponsorship of the employee defined benefit pension plan.

DOE has oversight responsibility with respect to these defined benefit pension plans. DOE's policy is to reimburse its contractors for minimum contributions required under ERISA (Employee Retirement Income Security Act of 1974). This funding amount sometimes differs from the amount required under CAS (Cost Accounting Standards) 412 and 413.

As a result of the divergence of DOE's policy from the requirements of CAS 412 and 413, COE contractors sometimes find themselves in non-compliance with CAS. Therefore, DOE includes an indemnification clause, so to speak, in their contracts that protects contractors from liability for not complying with CAS. Even if the clause is not in the contract, it is DOE's policy not to disallow costs or otherwise penalize a contractor for CAS non-compliance due to the contractor's compliance with DOE direction.

This indemnification clause does not waive CAS. In only indemnifies the contractor for non-compliance with CAS that are caused by the contractors following DOE written direction. DOE contractors must comply with all other terms of the contract (to the extent not precluded by DOE's direction), including those relating to the timing of funding that are found in the FAR and DOE FAR Supplement (DEAR) cost principles.

DOE has published guidance that before requesting an audit of affected contracts, contracting officers must advise auditors of the divergence of DOE requirements from CAS 412 and 413 and direct auditors to audit to DOE's requirements when incongruities with CAS occur.

Often, the divergence between DOE and CAS are due to budgetary constraints at the DOE level where insufficient funding is available to fund plans according to CAS.

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.