oversight

Cost Accounting: Department of Energy's Management of Contractor Pension and Health Benefit Costs

Published by the Government Accountability Office on 1990-08-29.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

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                         United   States   General   Accounting   Office
c-j()              . .   Report to the Chairman, Subcommittee
                         on Environment, Energy, and Natural
                         Resources, Committee on Government
                         Operations, House of Representatives

August   1990
                         COST ACCOUNTING
                         Department of
                         Energy’s Management
                         of Contractor Pension
                         and Health Benefit
                         costs




  GAO/AFMD-90-13
GAO                United States
                   General Accounting  Office
                   Washington, D.C. 20548

                   Accounting and Financial
                   Management Division

                   B-234083

                   August 29, 1990

                   The Honorable Mike Synar
                   Chairman, Subcommittee on
                     Environment, Energy, and
                     Natural Resources
                   Committee on Government Operations
                   House of Representatives

                   Dear Mr. Chairman:

                   The Department of Energy (DOE) is currently contracting with approxi-
                   mately 50 management and operating (M&O) contractors who operate
                   DOEsites throughout the country. The Department fully reimburses all
                   allowable costs incurred under these contracts. Allowable costs include
                   those for pension and health benefits of approximately 130,000 con-
                   tractor employees.

                   In light of concerns raised by a June 1987 report by the DOE Office of
                   Inspector General (OIG), you requested that we review certain policies
                   and practices of DOE and its contractors with regard to pension and
                   retiree health plans. As agreed with representatives of your office, we
                   reviewed (1) the funding of contractors’ pension plans, (2) methods of
                   segregating the pension cost of DOE work from that of other contractor
                   work, (3) the payment of postcontract pension and retiree health benefit
                   costs, and (4) DOE’S management and audit of contractors’ pension plans.


                   We found that DOE has actively developed departmental policies on pen-
Results in Brief   sions and retiree health benefits to take advantage of the nature of M&O
                   contracts. Nevertheless, we found that DOE is lacking formal policy in
                   important areas. Presently, DOE has no policy on the level to which con-
                   tractors should fund their pension plans. As a result, they are probably
                   funded to a higher level than would otherwise be the case. Nor does DOE
                   have adequate policy on settling its liability for pension costs and retiree
                   health benefits when contracts expire.

                   Finally, the annual financial audits of the contractors’ site-specific pen-
                   sion plans we reviewed were limited in scope and resulted in disclaimers
                   of opinion. Thus, they limited DOE'S management oversight and control
                   over pension plan assets.




                   Page 1                       GAO/AlWIMO-13 DOE Contractor Pension and Health Benefits
                        5234083




                        Management and operating contractors’ private sector pension plans are
Background              generally covered by the Employee Retirement Income Security Act of
                        1974 (ERISA) and the Internal Revenue Code (IRC). These laws incorpo-
                        rate reporting requirements and set guidelines on minimum required
                        contributions and maximum deductible contributions.

                        DOE's policy does not permit contractors to simply include their DOE site
                        employees in companywide pension plans. Rather, the policy is to nego-
                        tiate contractual requirements for site-specific plans or separate
                        accounts. The purpose of these arrangements is to segregate the pension
                        cost attributable to DOE work from that attributable to other work. One
                        result of site-specific plans or separate accounts is that the total pension
                        cost of employees who transfer to and from other contractor locations
                        must be allocated by some method between the two locations.

                        When a contract is allowed to expire and a contractor leaves a DOE site,
                        the workforce generally transfers to the successor contractor. Retired
                        workers, however, sometimes remain with the former contractor. When
                        that occurs, the parties must agree on how the contractor will be com-
                        pensated for the health benefit and pension costs that the contractor
                        will pay out in the future. This agreement can involve negotiations over
                        difficult issues, such as the rate at which retiree medical costs will rise
                        and the extent to which the contractor will increase pension benefits in
                        response to future inflation.

                        DOE's primary control over a contractor’s pension program is divided
                        between two organizations: the field office responsible for monitoring
                        the contractor and the headquarters Office of Industrial Relations (OIR).
                        The field office is responsible for the award and administration of con-
                        tracts. Field office managers have line responsibility and report directly
                        to either the Under Secretary or to the Assistant Secretary for Nuclear
                        Energy. OIR is responsible for establishing departmental policies on con-
                        tractors’ pension plans. In addition, DOE'S OIG is responsible for auditing
                        all aspects of the contractors’ DOE operations. Additional background
                        material is presented in appendix I.


                        Our objectives were to examine the (1) funding of contractors’ pension
Objectives, Scope,and   plans, (2) segregation of the pension cost of DOE work from that of other
Methodology             contractor work, (3) payment of postcontract pension and retiree health
                        benefit costs, and (4) management and audit of contractors’ pension
                        plans.



                        Page2                    GAO/AF‘MD-9@13DOEContractorPemionandHeakhEknefits
                        B-234083




                        To study funding of the plans, we interviewed DOE personnel at head-
                        quarters and in field offices, contractor personnel, and representatives
                        of the DOE OIG. We also reviewed annual reports on contractors’ pension
                        plans (actuarial reports and reports to the Internal Revenue Service
                        (IRS)) to determine the level to which plans were funded at the latest
                        time for which information was available.

                        To ascertain how pension cost attributable to DOE work is segregated, we
                        reviewed DOE'S policies and practices requiring contractors to set up site-
                        specific plans or separate accounts. We also reviewed the actual estab-
                        lishment of a site-specific plan at a WE site.

                        To evaluate pension and health benefits paid out after contracts expire,
                        we reviewed in detail a settlement that DOE negotiated with one con-
                        tractor at contract expiration. We also reviewed DOE'S policies regarding
                        reimbursement of such costs.

                        To assess how DOE manages and audits contractors’ pension programs,
                        we reviewed management’s written policies and identified the principal
                        DOE organizational units, at headquarters and in the field, that develop
                        and implement that policy. We reviewed DOE OIG audit reports on con-
                        tractors’ pension costs and reports by independent public accountants
                        (IPAS) on pension plan financial statements. We also conducted inter-
                        views with DOE representatives in headquarters and in the field and
                        with representatives of the DOE OIG.

                        Our review was conducted in accordance with generally accepted gov-
                        ernment auditing standards. Our work was done at DOE headquarters,
                        where we dealt mainly with the OIR, and at seven DOE field offices and
                        management and operating contractor sites. (Appendix II contains a
                        more detailed discussion of our objectives, scope, and methodology.)


                        DOE'S contractors can make annual contributions in amounts between the
DOE Has Not             minimum and maximum guidelines set by ERISA and the Internal Rev-
Established a Funding   enue Code. DOE presently sets no additional limits on the size of contrac-
Policy                  tors’ contributions to their pension plans. Thus, contractors are allowed
                        to decide-within    ERISA and Internal Revenue Code guidelines-how
                        much of DOE's resources are invested in contractors’ pension plans. As a
                        result of a June 1987 OIG recommendation, DOE has proposed for com-
                        ment a formal funding policy. At present, however, DOE is evaluating
                        responses to the proposed policy.



                        Page 3                   GAO/AFMD9@13 DOEContractor Pension and Health Benefits
B-234083




We reviewed the OIG’S June 1987 report in which it was reported that 20
contractors had-as of the beginning of fiscal year 1983-pension
assets of $2 billion-about  $600 million above the present value of
accrued benefits. The report also stated that the contractors’ total 1983
contributions of $222 million exceeded the minimum required by ERISA
by $94 million.

During the course of our review, we compared plan assets and liabilities
using more current data. We made two comparisons commonly used by
actuaries in annual pension reports. In the first test, we examined eight
plans operated by five contractors.’ We compared the market value of
assets with the present value of accrued benefits. We found that seven
of the eight contractor pension plans had more assets than the present
value of accrued benefits. The ratio of assets to the present value of
accrued benefits ranged from 95 to 208 percent. Only one plan had a
funded ratio less than 100 percent. Appendix III presents the complete
results of this first test.

In our second test, we compared the actuarial value of plan assets and
actuarial liabilities for seven of the eight plans mentioned above. The
actuarial value of plan assets is a value produced by any of a variety of
methods designed to smooth out short-run changes in the fair market
values of plan assets. The actuarial liability is usually based on pro-
jected benefits, which are calculated assuming that participant service
 and pay increases will continue until an assumed retirement age. In four
 cases, plan assets exceeded actuarial liabilities; in the other three cases,
 plan assets were less than actuarial liabilities. Funded ratios varied
 from 83 to 157 percent.z

In the absence of a funding policy, DOE has not systematically deter-
mined how much of its resources to allocate to contractors’ pension
plans rather than to other programs, The resources allocated to contrac-
tors’ pension plans are substantial and sometimes in excess of plan lia-
bilities. Sandia’s pension plans, for example, had assets of


‘There were eight plans for five contractors because some contractors had separate plans for dif-
ferent classes of employees (for example, one plan for hourly-paid employees and one for salaried
employees).
%cause of the complexity involved, we did not attempt to determine how much of the excess of plan
assets over plan liabilities was caused by contributions above what would have been permitted had
the proposed funding policy been in place. We acknowledge that some of the excess of plan assets
over plan liabilities was caused by investment earnings greater than those that had been expected. A
DOE actuary, however, confirmed our conclusion that plans’ funded ratios would have been less had
a funding policy been in place.



Page 4                           GAO/AFMDsO-13DOE Contractor Pension and Health Benefits
approximately $1 billion (at market value) as of January 1, 1988 (the
latest date for which information was available). Plan assets were about
180 percent of the present value of accrued benefits and about 125 per-
cent of the plans’ actuarial liabilities. If DOE had played more of a role in
determining contributions to these plans, it might have decided not to
fund to such a level and could have used the resources for other pur-
poses. Investments of DOE resources in such plans, however, do benefit
the Department in that they earn market returns, which serve to reduce
future plan contributions.

There may be potential problems associated with pension plans that are
funded above plan liabilities. First, funding above plan liabilities may
distort the pattern of pension costs charged to contractor programs,
such as nuclear research, over the years. In earlier years, programs are
overcharged. In later years, when no contributions are made, because
plans have reached or exceeded the maximum tax-deductible level of
funding, programs are undercharged.

Second, as noted in pension literature,” the fact that pension plans are
funded above plan liabilities may invite participant pressure for benefit
increases. When a plan is well funded, benefit increases appear to be
more affordable because they can be financed-at least partially-from
existing funds rather than from increased future contributions.

Third, funding levels higher than liabilities encourage the use of pension
funds to finance health care costs, which, unlike pensions, have not been
prefunded. Our review revealed a case in which Martin Marietta pro-
posed using any excess funds in its site-specific pension plan to pay
retiree health benefits in the event the contract was terminated with no
successor contractor. A DOE official told us that DOE turned down Martin
Marietta’s proposal because it would have encouraged the contractor to
fund its pension plan at a level higher than liabilities.




%ee Dan M. McGill, Fundamentals of Private Pensions, 5th edition (Homewood, Illinois Klc,hard I)
Irwin, 1984), p. 370.



Page 5                           GAO/AFMD90-13 DOE Contractor Pension and Health Benefits
                       B-234083




                       DOE has an interest in ensuring that it reimburses contractors only for
DOE Segregates         those benefits earned by contractor employees at M3E sites and not for
Contractors’ Pension   the benefits earned by contractor employees at contractors’ commercial
Costs in One of Two    operations. Otherwise, government funds might be subsidizing contrac-
                       tors’ commercial operations.
Ways
                       DOE Order 3830.1, dated August 23, 1982, states that contracts should
                       provide for site-specific plans or “separate accounting.” In the event of
                       contract expiration, these arrangements provide for the disposition of
                       plan assets and liabilities.

                       We reviewed the characteristics of site-specific plans and separate
                       accounting. Both are designed to ensure that assets attributable to DOE
                       contributions are used to pay only the benefits earned on DOE contracts.
                       Site-specific plans achieve this objective by legally segregating plan
                       assets in a pension plan separate from the contractor’s other plans. Site-
                       specific plans also usually have separate brochures explaining benefits;
                       separate actuarial reports of contributions, assets, and liabilities; and
                       separate annual reports of financial and other information to the IRSand
                       the Department of Labor.

                       Separate accounting differs in two significant ways from a site-specific
                       plan. First, site employees continue as participants in the corporate
                       plan. Second, assets are not legally segregated from those of the corpo-
                       rate plan. The contractor simply keeps a memorandum account of the
                       assets attributable to DOE contributions. Since assets are not legally seg-
                       regated from those of the corporate plan, a special contract clause gov-
                       erns refunds to the Department in the event the contract expires or the
                       plan is terminated. The clause requires the contractor to use corporate
                       funds to refund the net assets attributable to DOE contributions if such
                       refunds cannot be made from the pension fund. Such refunds from pen-
                       sion funds may be prohibited by EFUSA    if the plan is funded below a cer-
                       tain point on an overall basis.

                       Of the seven sites we reviewed, five had site-specific plans. At one site,
                       General Electric/Knolls, DOE was negotiating a site-specific plan during
                       the course of our review. At another site, Westinghouse/Bettis, DOE com-
                       pleted negotiations of separate accounting shortly after the close of our
                       review.

                       DOE'S goal in segregating pension costs attributable
                                                                          to its contracts
                       appears to be sound. Legal segregation of plan assets from the assets of



                       Page 6                   GAO/AFMB9Sl3 DOE Contractor Pension and Health Benefits
_----I
                         B-234083




                         other contractor plans ensures that they will be available to pay bene-
                         fits earned on DOE contracts. In addition, pension costs and obligations
                         are computed separately for each site-specific plan. Consequently. a sep-
                         arate plan for a DOE site helps ensure that pension cost reflects the age,
                         length of service, and other characteristics of DOE contract employees
                         and that actuarial assumptions reflect expected conditions at the DOE
                         site.

                         Separate accounting has not been tested in a contract expiration. Conse-
                         quently, we were unable to determine whether the special contract
                         clause will work as well as legal segregation of assets, a characteristic of
                         site-specific plans. Appendix IV presents further details of establishing
                         both site-specific plans and separate accounting.


                         Once a site-specific plan or a separate account has been established. the
DOE Does Not Follow      total pension cost of an employee who transfers between the site plan
Its Policy on Employee   and another contractor plan must be allocated between the two plans.
Transfers                Employee transfers can involve significant amounts. At one location,
                         General Electric/Knolls, data were available that enabled us to compute
                         the cumulative value of the pensions earned by employees who trans-
                         ferred over a lo-year period, 1976-1985. The cumulative value, at the
                         end of that lo-year period, attributable to employees who transferred
                         from General Electric’s DOE facility to other contractor locations was
                         about $9 million. The cumulative value attributable to employees who
                         transferred from other contractor locations to General Electric’s DOE
                         facility was about $12 million.

                         DOE’s pension order requires that an employee who transfers between
                         plans receive a payment from each plan4 We found, however, that con-
                         tractors were, with the approval of DOE, using another approach. Four of
                         the seven contractors we reviewed transferred the liability for an
                         employee’s pension earned to date from the former plan to the
                         employee’s new plan. To offset the liability, an equal amount of assets
                         was also transferred from the former plan to the new plan. This was
                         true at Martin Marietta, General Electric/Knolls, Sandia, and Monsanto.
                         OIR told us it now believes that transferring assets is preferable to a two-
                         check policy. OIR also said it did not want to be limited by a policy
                         because it wanted to negotiate transfers with contractors on a case-by-


                         % practice, one plan may issue checks in the full amount of an employee’s pension and be partlaily
                         reimbursed by the other plan



                         Page 7                           GAO/AFMD-90-13DOE Contrnctir Pension and Health Benefits
                        B234083




                        case basis. DOE'S most recent draft of the order is silent on the issue of
                        employee transfers.


                        During contract performance, DOE’S policy is to reimburse management
DOE Policy Does Not     and operating contractors on a pay-as-you-go basis for the cost of retiree
Address All             health benefits and for any pension ad hoc cost-of-living adjustments
Postcontract Cost       (COLAS).~ As a result, these costs generally are not funded or accrued
                        over employees’ working lives; rather, they are recognized and paid
Issues                  after retirement. Thus, when contracts expire, contractors have not yet
                        been compensated for the cost of retiree health benefits and for any
                        pension ad hoc COLASthat will be paid out in the future.

                        DOE’S formal policy is to pay for a contractor’s postcontract retiree
                        health benefits if it has approved the plan in advance. DOE has also
                        agreed to pay for postcontract ad hoc COLASwhen it believes they are
                        warranted, even though DOE’S pension order is silent on the subject. For
                        example, when Monsanto’s contract to operate the Mound facility
                        expired in 1988, DOE negotiated a lump sum settlement of $13.5 million
                        for postcontract ad hoc COLAS.Before agreeing to that settlement, DOE
                        advised us that it had satisfied itself that the contractor had a consis-
                        tent record of granting ad hoc COLAS to its non-WE retirees.

                        When contracts expire, DOE has three possible approaches to pay for
                        postcontract retiree costs:

                      . agree with the contractor on a lump-sum settlement,
                      . continue to reimburse the contractor for costs on a pay-as-you-go basis,
                        or
                      . transfer retirees to the successor contractor.

                        In one instance, DOE has agreed to a lump-sum settlement with a con-
                        tractor. When DOE’S Mound facility contract with Monsanto expired in
                        September 1988, DOE negotiated lump-sum settlements of $40 million to
                        cover retiree health benefits and $13.5 million to cover ad hoc COLAS. DOE
                        has not used the second alternative-continued     reimbursement on a
                        pay-as-you-go basis-in recent years. It is an option, however, that DOE
                        has agreed to in several contracts. The third alternative-transferring



                        ‘Ad hoc COLAS, which many companies grant from time to time to help compensate retirees for the
                        rising cost of living, differ from COLAS that are automatically provided under the terms of a few
                        pension pkins.



                        Page 8                          GAO/AFMD-9@13DOEContractor Pension and Health Benefits
B-234083




retirees-was used when Martin Marietta succeeded Union Carbide at
Oak Ridge in 1984.

DOE'S formal policy on health benefits, DOE Order 3890.1, Contractor
Insurance and Other Health Benefits Programs, provides that DOEwill
pay for postcontract retiree health costs and that it will do so by any
reasonable method. It states, in paragraph 5.i. of chapter II, “Subse-
quent to contract termination or expiration, benefit continuation will be
provided for those who earned such benefits, according to the approved
benefit plans, on a funding basis most reasonable to the Department.
Among acceptable arrangements for these provisions are paying a sum
to the outgoing contractor to continue its liability, paying a third party
such as an insurer, to guarantee benefit payments, or continuing the
benefit payment obligation with the replacement contractor.” A DOE
official told us that no additional policy exists in other forms such as
memoranda.

While DOE'S present formal policy on contractors’ pension programs
(Order 3830.1, August 23, 1982) discusses the settlement of DOE'S pen-
sion obligations when contracts expire, it is silent with respect to ad hoc
COLAS.We were told that DOE'S revised order, which is currently in proc-
ess, will also likely be silent on postcontract ad hoc COLAS.Instead of
having a formal policy, DOE prefers to address postcontract ad hoc COLAS
on a case-by-case basis as they are claimed by contractors when con-
tracts expire.

The contractual arrangements between DOE and the seven contractors
we reviewed varied in their treatment of postcontract retiree costs in
the event of contract expiration and replacement by a successor con-
tractor. Du Pont’s, Monsanto’s, and General Electric/Knolls’ contracts
allow for settlements in terms of lump sums or, in the alternative, pay-
as-you-go reimbursement. Two contracts, Martin Marietta’s and West-
inghouse/Hanford’s, allow for transferring retirees to successor contrac-
tors. In the case of Westinghouse/Bettis and Sandia, contracts are silent
with respect to postcontract retiree costs, and the treatment of these
costs will be decided by the parties when the contracts expire.

DOE operates with the philosophy that it will reimburse contractors for
the cost of all employee benefits earned under the contract, regardless
of whether such benefits are paid during or after contract performance.
Determining whether DOE should pay for postcontract retiree costs was
not within the scope of our review. To gain a broader perspecti\,e of this



Page 9                   GAO/AFMD-90-13DOE Contractor   Pension and Hralt h Benefits
    5234083




    issue, we did, however, inquire of the Defense Contract Audit Agency,”
    as to how it had handled similar situations. The results of our inquiry
    and a brief analysis of the treatment of postcontract costs at an Army
    munitions plant are contained in appendix V.

    In one case-the 1988 expiration of Monsanto’s contract to operate the
    Mound facility-DOE has chosen the lump-sum payment approach for
    settling the liability it has assumed for postcontract retiree costs. Such
    lump-sum settlements for health benefits represent a potential risk for
    contractors because of uncertainties in estimating retirees’ medical costs
    over the years when their claims will be paid. Because of the uncertain-
    ties, none of the approximately 10 insurance companies that MOE
    approached during its Monsanto negotiations expressed a willingness to
    provide such coverage in return for a single premium. The uncertainties
    involved in estimating a lump sum also pose difficulties for DOE in deter-
    mining whether a given lump sum is a reasonable price to pay for
    having a contractor assume these liabilities.

    Lump sums are estimates of the present value of the future benefits that
    will be paid out for retirees’ health care. Certain difficulties arise when
    contractors make and DOE evaluates such estimates. Among these are
    the following:

l   An assumption must be made as to the rate at which the retirees’ health
    care costs will increase over the years during which the claims will be
    paid out. This assumption reflects such factors as medical care inflation,
    health care utilization, technological advances, and changes in the
    health status of the retirees and their covered dependents.
l   Difficulties arise in reflecting future plan changes in calculations of
    lump sums. DOE is faced with the uncertainty of the contractor’s future
    plan changes to contain escalating health care costs. Cost-cutting mea-
    sures likely to affect retirees are increases in deductibles, co-payments,
    and/or premium contributions.7 If the contractor pursues such cost-cut-
    ting measures in the future, DOE would not benefit from the ensuing cost
    savings.

    Estimating lump sums for ad hoc COLASpresents even more uncertainty
    because the COLAS,by definition, may or may not be granted. If DOE

    “The Defense Contract Audit Agency performs contract auditing for the Department of Defense

    ‘In a 1988 survey, Retiree Medical Benefits, The Washington Group on Health found that 69 percent
    of the 95 firms surveyed made these changes in the last 2 years prior to the survey or planned to
    make them within the next 2 years.



    Page 10                         GAO/AFMD-So-13DOE Contractor Pension and Health Benefits
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                         decides, based on a contractor’s history, that they will be granted, DOE
                         estimates the rise in the cost of living and the contractor’s benefit
                         increases in response to that rise. For example, a DOE official told us that
                         the $13.5 million lump-sum settlement with Monsanto was based on an
                         estimate that Monsanto would increase benefits annually by 3 percent.
                         Since the 1960s Monsanto has granted ad hoc COLASthat compensated
                         retirees for about 40 percent of the increase in the Consumer Price
                         Index. Estimating a 5-percent annual growth in the index, the Depart-
                         ment attempted to negotiate a 2-percent annual increase in benefits.
                         Because of trade-offs in other aspects of the negotiations closing out the
                         contract, DOE agreed to a 3-percent annual increase in benefits.



DOE Management and
Audit of Pension Plans
Could Be Enhanced

Management of            DOE'S management responsibility for M&O contractors’ pension plans is
                         divided between two organizations: DOE field offices that are responsible
Contractors’ Plans       for the award and administration of contracts and OIR in headquarters.

                         Field office managers have line responsibility. They report to either the
                         Under Secretary for Operations Offices or to the Assistant Secretary for
                         Nuclear Energy. Field office managers are delegated the authority to
                         serve as contracting officers, that is, those DOE representatives with
                         legal authority to enter into binding contracts on behalf of the Depart-
                         ment. Field office managers typically have an Industrial Relations staff,
                         including a person who is responsible for reviewing pension reports
                         received from the contractor and dealing with the contractor with
                         respect to pension issues. That person, however, is not an actuary.

                         OIR in headquarters, on the other hand, is responsible for establishing
                         departmental policies and procedures on contractors’ pension programs.
                         It derives its authority from DOE directives that require, for example, OIR
                         approval of changes to contractual language governing pension plans.
                         The OIR has two actuaries, who provide technical advice to field offices,
                         review contractors’ pension reports passed on to them from field offices,
                         and assist in the negotiation of pension liabilities when contracts expire.
                         The OIR is also responsible for improving policy. For example, it is cur-
                         rently rewriting the DOE pension order, which will, among other things,



                         Page 11                   GAO/AF’MD-90-13DOE Contractor Pension and Health Benefita
    Ii-234083




    set forth the new funding policy discussed earlier. The OIR is also respon-
    sible for implementing change to comply with DOE’S pension policies.
    Establishing site-specific plans or separate accounting is an important
    example.

    Establishing a site-specific plan or separate accounting illustrates the
    roles of field offices and the OIR. In both the cases we reviewed (General
    Electric/Knolls and Westinghouse/Bettis), the OIR notified the respective
    field office managers that current arrangements did not comply with
    DOE policy. This notification was timed to enable the field officer man-
    ager, in his or her role as contracting officer, to include pension issues in
    upcoming negotiations accompanying contract renewal. The contracting
    officer then negotiated new contractual language with the advice and
    approval of the 01~.

    We observed that implementing change to contractual agreements is a
    time-consuming process. Among the delays we noted were the following:

l Negotiations for a site-specific plan at General Electric/Knolls began in
  April 1982. At the close of our review in December 1989, the value of
  the pensions owed to retirees still had not been negotiated. Over 7 years
  had elapsed.
l In December 1984, OIR told the responsible field office that current pen-
  sion arrangements at Westinghouse/Bettis did not comply with DOE
  policy. The initial amount of assets assigned to the separate account was
  negotiated in January 1990. Five years had elapsed.
. In June 1987, the OIG recommended that DOE limit annual contributions
  to the minimum required by ERISA except in “extraordinary circum-
  stances.” In January 1988, the Department reached agreement with the
      on a new funding policy. At the close of our review 2 years later,
    OIG


  such an order had not been issued by DOE.

    We also observed two instances of delay in resolving other issues. It took
    the OIR 21 months to approve new multiple employer plans at the Han-
    ford site, and more than 3 years had elapsed before DOE was able to
    negotiate contractual language with Martin Marietta governing contract
    terminations.

    Undue delay in resolving issues being negotiated increases the risk that
    the problem that the negotiations were intended to prevent will occur.
    For example, the longer the delay in negotiating a site-specific plan, the
    greater the risk that the contractor will allow its contract to expire
    without such a plan.


    Page 12                   GAO/AFMD9@13 DOE Contractor Pension and Health Benefits
                 B-234083




Audit Coverage   Management and operating contractors’ pension programs receive audit
                 coverage in two ways. First, the OIG is responsible for auditing contrac-
                 tors’ pension programs as part of its review of contractors’ operations
                 and costs. The OIG performs this task by means of audits that specifi-
                 cally deal with pension issues and by annual audits designed to test the
                 reliability of contractors’ cost representations. Appendix VI discusses
                 the OIG’S audit coverage of contractors’ pension cost.

                 Private sector pension plans, such as those operated by the contractors
                 we reviewed, are generally subject to annual financial audits by IPAS.
                 Financial statements, including the auditor’s report, usually become part
                 of the annual report filed with the IRS. The IRS then provides a copy to
                 the Department of Labor.

                 ERM     allows plan administrators? to exclude assets that are held by regu-
                 lated financial institutions, such as banks and insurance companies,
                 from the scope of IPA audits. Instead of examining the financial institu-
                 tion’s records, the auditor can, by regulation, accept the institution’s cer-
                 tification that the statement of assets received by the plan is accurate.
                 As a result, significant amounts of plan assets are not audited by plan
                 auditors. The Department of Labor’s Inspector General recently found
                 that nearly half the IPA audits it reviewed had such a scope limitation.”

                 We found that all seven of the audits performed on site-specific plans
                 resulted in disclaimers of opinion because of such scope limitations. ‘I’

                 The Department of Labor has proposed amending ERISA to repeal the
                 limited scope exemption. Although we have not evaluated the specific




                 HThe plan administrator is generally either the plan sponsor or a designated person or committee
                 charged with responsibility for operating all aspects of the plan, including the management of its
                 assets.
                 “Changes Are Needed in the ERISA Audit Process to Increase Protections for Employee Benefit Plan
                 Participants, Report No. UY-Ym         (Nov. Y,.lY8Y).

                 ‘“The other two site-specific plans were those of General Electric/Knolls and Du Pont. The new site-
                 specific plan at General Electric/Knolls had not prepared a separate annual report as of the close of
                 our review in December 1989. Du Pont’s Savannah River employees were participants m Du Pont’s
                 companywide plan. At the outset of the contract in 1950, the government and Du Pont entered into a
                 special arrangement covering the funding and reimbursement of pension cost attributable to those
                 employees. We were told by a Du Pont official that because DOEguarantees that the benefits of those
                 employees will be paid, Du Pont excludes planassets and liabilities attributable to Savannah River
                 employees from its annual report. Consequently, no fiiancial audit was performed of the Sat annah
                 River portion of the Du Pont pension plan.



                 Page 13                           GAO/APMDW13 DOE Contractor Pension and Health Benefits
              8334033




              details of the proposal, we agree that full-scope audits should be
              required for employee benefit plar~s.~~

              Neither DOE’S pension policy nor WE contracts address the issue of plan
              financial audits. As a result, decisions on audit scope are made solely by
              contractors, in their capacity as plan administrators, even though DOE
              reimburses all contributions to a plan and plan assets will be used to pay
              benefits earned on DOE contracts.


                   has not systematically determined how much of its resources to allo-
Conclusions   DOE
              cate to contractors’ pension plans. In these times of budgetary con-
              straints, it would serve DOE well to have more input into these decisions.
              In addition, the lack of a funding policy increases the likelihood that
              contractors’ pension plans will be funded at levels higher than liabilities
              because there is no DOE cap on contractor contributions.

              DOE’S failure to follow its policy with respect to employee transfers
              detracts from the policy’s overall credibility. Seeing an aspect of policy
              simply disregarded by oIR--the headquarters group responsible for for-
              mulating pension policy-could      reduce the importance of adhering to
              other aspects of the policy in the eyes of DOE field office personnel and
              contractors.

              DOE  has only limited policy on postcontract retiree health benefits and
              no policy on postcontract ad hoc UXAS. Policy does not set forth criteria
              for determining whether a proposed lump sum represents a reasonable
              price to pay in return for a contractor assuming liability for postcon-
              tract retiree health benefits or ad hoc COLAS.

              DOE  has limited oversight control over pension fund assets because of
              scope limitations on audits conducted by independent IPAS. Neither DOE’S
              pension policy nor DOE contracts address the issue of plan financial
              audits. Decisions on limited-scope audits are made solely by contractors
              even when DOE reimburses all contributions to a plan and plan assets
              will be used to pay benefits earned on DOE contracts. In view of the large
              amounts of plan assets, full-scope audits are worthwhile to provide DOE
              greater assurance that its financial interests in those assets are being
              protected.


              “Federal Government’s Oversight of Pension and Welfare Plans (GAO/T-HRD90-37, June 13.
              1990).



              Page 14                       GAO/AFMD-W13 DOE Contractor Pension and Health Benefits
                      We recommend that the Secretary of Energy direct the Office of Indus-
Recommendations       trial Relations to

                  l Ensure that the revised DOE pension order includes a formal funding
                    policy, encourages plan administrators to choose full-scope audits of
                    site-specific pension plans, and addresses issues related to employee
                    transfers and postcontract ad hoc COLAS.
                  l Develop additional policy and procedures on settling postcontract
                    retiree health benefits which set forth the criteria for deciding at con-
                    tract expiration which approach-lump-sum        settlement, continued pay-
                    as-you-go reimbursement, or transfer of employees to the successor con-
                    tractor-should    be used.
                  . Evaluate the resolution process for pension issues and accelerate the
                    resolution of those that are long-standing.

                      As agreed with your office, we did not obtain written comments on a
                      draft of this report. However, we did discuss its contents with respon-
                      sible agency officials and incorporated their views where appropriate.

                      We are sending copies of the report to the Secretary of Energy, the
                      Director of the Office of Management and Budget, the Inspector General
                      of the Department of Energy, and other interested parties. Copies will
                      also be made available to others upon request.

                      Please contact me at (202) 275-9489 if you or your staff have any ques-
                      tions regarding the contents of this report. Major contributors to this
                      report are listed in appendix VII.

                      Sincerely yours,




                      Rein Abel
                      Director, Cost and
                        Regulatory Accounting




                      Page 15                   GAO/AFMD-W-13DOE Contractor Pension and Health Benefits
Contents


Letter                                                                                   1

Appendix I                                                                             18
Background
Information
Appendix II                                                                            20
Additional Details on
Our Objectives, Scope,
and Methodology
Appendix III                                                                           24
Ratio of Plan Assets to
Present Value of
Accrued Benefits
Appendix IV                                                                            25
Setting Up a Site-
Specific Plan or
Separate Accounting
Appendix V                                                                              26
Differing Positions on
Paying for
Postcontract Costs
Appendix VI                                                                             28
DOE OIG Audit
Coverage of
Contractors’ Pension
costs


                          Page 16   GAO/AFMIM@lS DOE Contractor Pension and Health Benefits
                        Contents




Appendix VII                                                                                        29
Major Contributors to
This Report




                        Abbreviations

                        AICPA      American Institute of Certified Public Accountants
                        COLA       cost-of-living adjustment
                                   Defense Contract Audit Agency
                        DOD        Department of Defense
                        DOE        Department of Energy
                        ERISA      Employee Retirement Income Security Act
                        IPA        Independent Public Accountant
                        IRC        Internal Revenue Code
                        IRS        Internal Revenue Service
                        M&O        management and operating
                        OIG        Office of Inspector General
                        OIR        Office of Industrial Relations
                        PVAB       present value of accrued benefits


                        Page 17                  GAO/AFMDO-13 DOE Contractor Pension and Health Benefits
Appendix I

Background Information


               The Department of Energy, which is responsible for the government’s
               atomic energy defense activities and other energy programs, accom-
               plishes much of its mission by contracting with over 50 management
               and operating contractors. These contractors operate DOE sites under
               cost-reimbursable’ contracts. They employ about 130,000 employees.

               The concept underlying management and operating contracts was devel-
               oped by the Army’s Manhattan Engineer District, a forerunner of DOE.
               During World War II, the District contracted with major industrial com-
               panies and research institutions to develop government-owned facilities
               for the development and production of the atomic bomb. The idea was to
               engage private enterprise as a partner in accomplishing a federal
               mission.

               Today, management and operating contractors operate, for example,
               facilities that research, develop, and test nuclear weapons; produce
               nuclear materials and weapons; and provide repositories for radioactive
               wastes. They also design naval nuclear reactors, run the Strategic Petro-
               leum Reserve and the naval petroleum reserves, and perform basic
               physics research.

               Management and operating contracts generally have the following
               characteristics:

               The contractors use DoE-owned facilities.
               Contractors perform work that is separate from the remainder of their
               business.
               DOEagrees to pay the contractors’ allowable costs and usually a fee.
               Allowable costs include pension and health care costs.
               Contracts usually are extended for long periods. Many contractors that
               began operations in the 1940s or early 1950s are either still working for
               DOEor have recently left.
               When the contracts expire, current workers generally stay on the job
               and transfer to the successor contractor. For workers retired from the
               site, however, DOEand the contractor must agree on how health benefits
               and cost-of-living pension adjustments will be paid in the future.

               The contractors included in our review have defined benefit pension
               plans, under which they promise to pay specified benefits, such as a

               ‘Management and operating contractors pay for allowable costs from funds advanced to them by
               DOE. Technically, therefore, DOE is not “reimbursing” costs paid out of contractor funds To avoid
               the awkwardness of having to explain that, when we refer to contract costs being paid for by DOE.
               we use the terms “reimbursable” and “reimbursement.”



               Page 18                          GAO/AFMD-So-13 DOE Contractor Pension and Health Benefits
Appendix I
Background Information




percentage of the final average pay for each year of service. Such plans
are generally covered by the Employee Retirement Income Security Act
of 1974 and the Internal Revenue Code, which include minimum funding
and other requirements. For instance, the assets accumulated to pay a
plan’s benefits must be legally separated from the contractor’s other
assets.




 Page 19                 GAO/APMMO-13 DOE Contractor Pension and Health Benefits
Appendix II

Additional Details on Our Objectives, Scope,
and Methodology

                           The objective of our work was to assess DOE'S management of its man-
                           agement and operating contractors’ pension programs. In response to
                           the Subcommittee’s request, as modified in meetings with Subcommittee
                           staff, we addressed four issues:

               l           Funding. Our specific objectives were to examine DOE’s funding policy
                           for contractors’ pension plans and to determine funding levels for those
                           plans.
               l           DOE'S segregation of contractors’ pension cost attributable to its con-
                           tracts from that attributable to contractors’ other work. In this area, we
                           wanted to examine how DOE ensures that the cost of pension benefits
                           earned on DOE work is segregated from the cost of pension benefits
                           earned at other contractor locations.
               l           DOE'S payment of postcontract pension and health benefit costs. Our
                           objective was to evaluate how DOE reimburses contractors for health and
                           pension benefits paid out after contracts expire.
                   l       DOE’S methods of managing and auditing contractors’ pension programs.
                           Here we wanted to assess how DOE oversees and audits contractors’ pen-
                           sion programs.

                           Our work was done at DOE headquarters, where we dealt mainly with
                           OIR, and at selected DOE field offices and management and operating con-
                           tractor sites. Factors affecting the selection of field offices and contrac-
                           tors were the size of the contractor’s pension plan, geographical
                           location, and the presence of issues of interest to the Subcommittee.

                           Of a total of approximately 50 management and operating contractors,
                           we reviewed the following 7 contractors and their field offices:

                       l Martin Marietta Energy Systems, Inc., in Oak Ridge, Tennessee, operates
                         several facilities in Oak Ridge. The cognizant DOE field office is the Oak
                         Ridge Operations Office. Martin Marietta was selected partly because we
                         wanted to review the process by which it had replaced Union Carbide,
                         whose contract had expired in 1984.
                       l E.I. du Pont de Nemours and Company operated the Savannah River
                         Plant near Aiken, South Carolina, through March 31, 1989. DOE'S
                         Savannah River Operations Office is responsible for the plant. We
                         selected Du Pont partly because of the contract expiration issue.
                       . General Electric Company operates the Knolls Atomic Power Laboratory
                         near Schenectady, New York. DOE'S Schenectady Naval Reactors Office
                         oversees the laboratory. We selected General Electric/Knolls partly
                         because it was in the process of establishing a site-specific plan.



                           Page 20                  GAO/~90-13     DOE Contractor Pension and Health Benefits
                     Appendix II
                     Additional Details on Our Objectives, Scope,
                     and Methodology




                     Westinghouse Electric Corporation operates the Bettis Atomic Power
                     Laboratory near Pittsburgh. The DOE Pittsburgh Naval Reactors Office is
                     responsible for the laboratory.
                     Sandia Corporation, an AT&T subsidiary, operates the Sandia National
                     Laboratories in Albuquerque, which is overseen by DOE’S Albuquerque
                     Operations Office.
                     Monsanto Research Corporation operated the Mound facility in Miamis-
                     burg, Ohio, until September 1988. Monsanto was replaced by EG&G Inc.,
                     which formed a wholly-owned subsidiary to run the Mound facility.
                     DOE’S Albuquerque Operations Office and Dayton Area Office have over-
                     sight responsibilities. We selected Monsanto/Mound partly because we
                     wanted to review the settlement made at contract expiration for retiree
                     health benefits and ad hoc COLAS.
                   . Westinghouse Hanford Company is responsible for certain activities at
                     the Hanford site near Richland, Washington. The DOE field office is the
                     Richland Operations Office.


                     To study funding issues, we interviewed DOE personnel at headquarters
Funding Issues       and in field offices, contractor personnel, and representatives of the DOE
                     OIG. We also reviewed annual reports on contractors’ pension plans
                     (actuarial reports and reports to IRS)to determine the level to which
                     plans were funded at the latest time for which information was avail-
                     able. To test plans’ funded status, we extracted information for two
                     tests commonly used by plan actuaries in annual pension reports. For
                     one test, we compared the market value of assets with the present value
                     of accrued benefits.1 For the other test, we compared the actuarial value
                     of assets with the plan’s actuarial liability.” We also identified some of
                     the potential problems of funding plans above plan liabilities.


                     To ascertain how pension cost attributable to DOE work is segregated, we
Cost Segregation     reviewed DOE’S policies and practices dealing with commingled pension
                     cost. Commingled pension cost is a problem when contractors-like
                     DOE’S M&O contractors-have    one division doing government work and
                     other divisions doing commercial work. The contracting agency must

                     ‘The present value of accrued benefits is a liability measure based on participants’ current years of
                     service and earnings.
                     ‘The actuarial value of assets is any asset measure that is designed to stabilize the market value of
                     assets for actuarial purposes, for example, a moving average of year-end market values for the past
                     several years. For most methods used to calculate plan costs and obligations, the actuarial liability is
                     based on projected benefits, which are calculated assuming that participant service and pay increases
                     will continue until an assumed retirement age.



                      Page 21                          GAO/APMD90-13 DOE Cmxtractm Pension and Health Benefits
                     Appendix II
                     Additional Details on Our Objectives, Scope,
                     and Methodology




                     ensure that the pension cost generated by its work is adequately segre-
                     gated from the pension cost generated by commercial work.

                     We also reviewed the establishment of a site-specific plan at General
                     Electric/Knolls, which DOE had sought in order to achieve more accurate
                     cost segregation. We interviewed contractor personnel and DOE head-
                     quarters and field personnel. We reviewed correspondence between the
                     company and DOE to identify the issues that arose and how they were
                     resolved. We reviewed the contractual provisions dealing with the new
                     plan that the parties had agreed to. We also examined a statistical
                     sample of personnel records to find out the extent to which retirees had
                     worked at General Electric locations other than the Knolls site. (The
                     extent of non-Knolls service performed by retirees was a factor in deter-
                     mining the amount of compensation General Electric should receive in
                     assuming liability for these retirees.)


                     To evaluate how pension and health benefits are reimbursed after con-
Postcontract Costs   tracts expire, we reviewed DOE's policies and practices dealing with costs
                     that continue after contracts expire. The principal continuing costs
                     relate to retired workers since active workers generally transfer to the
                     successor contractor. The principal costs involved are pension benefits
                     and health care costs that will be paid out after contract expiration. We
                     reviewed DOE'S settlement with Monsanto in which it agreed to pay Mon-
                     santo $40 million for health benefits and $51.5 million for pension bene-
                     fits that will be paid out in the future. Of the $5 1.5 million in pension
                     benefits, $13.5 million was for future ad hoc cost-of-living adjustments.
                     We interviewed contractor and DOE headquarters and field personnel.
                     We reviewed the contract between DOE and Monsanto to determine what
                     the parties had agreed to with respect to postcontract costs. We also
                     reviewed correspondence between DOE and Monsanto to identify issues
                     and to determine how they were resolved. We reviewed the calculation
                      of the $40 million lump sum and the factors on which it was based. We
                      also identified alternatives other than lumpsum settlements that are
                      available for settling postcontract costs. We reviewed the use of one
                      such alternative-transferring     retirees to the successor contractor-at
                      Martin Marietta/Oak Ridge.


                     To assess how DOE manages and audits contractors’ pension programs,
Management and       we reviewed management’s written policies and identified the principal
Audit                DOE organizational units, at headquarters and in the field, that develop




                     Page 22                        GAO/APMD-W13 DOE Contractor Pension and Health Benefits
Appendix II
Additional Details on Our Objectives, Scope,
and Methodology




and implement that policy. We also conducted interviews with DOE rep-
resentatives in headquarters and in the field and with representatives of
the DOE OIG. We identified the types of audit coverage to which contrac-
tors’ pension programs are subject. We reviewed audit reports and inter-
viewed OIG representatives at headquarters, the Eastern Regional Audit
Office in Oak Ridge, and the Western Regional Audit Office in
Albuquerque.

Our review was conducted from August 1987 through December 1989.
We did our audit work in accordance with generally accepted govern-
ment auditing standards.




 Page 23                       GAO/APMD-90-13DOE Contractor Pension and Health Benefits
Appendix III

Ratio of Plan Assets to Present Value of
Accrued Benefits


Dollars in thousands
                                                                                            Present value of  Assets in                   Funded ratio
                                                   Valuation            Assets at          accrued benefits     excess                  (assets/ PVAB)
Plans0                                                 dateb         market value                    (PVAB)    ot PVAB                        (percent)
Du Pont                                              3131/a9             $1,252,100                 $791,53OC $460,570                              158
EG&G/Mound
  Hourly Paid Employees’ Plan                          r/1/90                 12,139                      8,074            4,065                       150
  Salaried Emplovees’ Plan                             i/1/90                 71,519                     47,254           24.265                       151
Martin Marietta                                        l/i/a9             i ,408,ooo                    a66100           539,900                       162
Sandia
  Retirement Income Plan                            12/31/87                822,856                     478,355          344,501                       172
  Pension Security Plan                             12/31/87                241,149                     i i 5,783        125,366                       206
Westinahouse/Hanford Multiple Emplover Plans
  Operations & Engineering Plan                        i /t/a9              221,999                     234,429           (12,430)                      95
  Represented Employees’ Plan                          I II 189              74,762                      69,075             5,667                      108
                                               aWe did not include in the table two contractors we reviewed-General        Electric/Knolls and Westtng-
                                               house/Bettis-because     the purpose of the table is to show the effect of DOE’s policies (or lack thereof)
                                               on plans’ funded status. Until recently those two contractors had companywide plans. Consequently,
                                               the funded status of the new sate-specific plan (for General Electric/Knolls) and the new separate
                                               account (for Westinghouse/Bettis)   was determined by the companies’ fundmg polictes, not DOE’s,

                                               bThe latest date as of which funding information was available.

                                               ‘Includes the present value of future ad hoc COLAS at 3 percent per year




                                               Page 24                                GAO/AF‘MD9@13DOE Contractor Pension and Health Ekneflts
Appendix IV

Ming Up a Site-SpecificPlan or
Separak Accounting

                      Developing a site-specific plan at an incumbent contractor entails the
                      following tasks:

              . DOE must negotiate with a contractor concerned about the ramifications
                of any change in the status quo.
              . Employee morale must be maintained. Neither the contractor nor DOE
                wants the employees to feel they will receive lower benefits under the
                site-specific plan.
              l Administrative tasks must be accomplished. New plan documents and
                brochures must be prepared, the approval of unions and the contractor’s
                board of directors must be obtained, and information required by the
                Internal Revenue Code and ERISA must be filed.
              . The beginning asset balance must be established. This is the amount to
                be transferred from the corporate plan to the site plan-a matter of
                obvious concern to both DOE and the contractor. The parties must deter-
                mine the amount of assets that would have been in the plan if assets
                attributable to DOE’S contributions over the years had always been sepa-
                rately identified. Ideally, that means reconstructing, for every year from
                the contract’s inception to the present, the amounts of (1) departmental
                contributions, (2) earnings on those contributions, and (3) payments to
                site retirees.
                Decisions must be made about employees who have retired after
                  l


                working at the DOE site. Should retirees remain with the corporate plan
                or be transferred to the new site-specific plan? If they remain with the
                corporate plan, it must be compensated for the liability it is assuming.

                      Many of the administrative tasks necessary to set up a site-specific plan
                      are unnecessary for separate accounting. Nevertheless, the most sensi-
                      tive task-negotiating  a beginning asset balance-must also be per-
                      formed under separate accounting.




                      Page 25                  GAO/AFMIMb13 DOE Contractor Pension and Health Benefits
Appendix V

Differing Positions on Paying for
Postcontract Costs

                     DOE’S practice is to pay the costs of retiree health benefits paid after
                     contracts expire and (when warranted) ad hoc COLASgranted after con-
                     tracts expire. Its operating philosophy is to reimburse contractors for
                     the cost of all employee benefits earned under the contract, regardless
                     of whether such benefits are paid during or after contract performance.

                     The Defense Contract Audit Agency (JXXA), however, has recommended
                     that the Army not pay for the postcontract retiree health benefit costs
                     of Remington Arms, a contractor that operated the Lake City Army
                     Ammunition Plant from the mid-1940s until the contract expired in
                     1985. Remington Arms retained retirees from the plant in its corporate
                     health plan and has claimed $60 million for future retiree health bene-
                     fits. The claim was based on, among other things, its interpretation of
                     the cost accounting standards incorporated in its contract. The Army
                     contracting officer had not, at the close of our review in December 1989,
                     made a final decision on paying these costs.

                     The Army contract is similar to a DOE management and operating con-
                     tract in several respects:

               l     Both call for the operation of government-owned facilities.
               l     Both involve work that is separate from other contractor business.
               l     In both cases, all allowable costs are paid by the government.
               l     Roth involve long-term relationships with contractors.

                     DMA took the position that the applicable cost accounting standards
                     incorporated in the Remington Arms contract did not permit the con-
                     tractor to change its practice of recognizing retiree health benefit costs
                     on a pay-as-you-go basis. Under the pay-as-you-go concept, the govern-
                     ment is responsible for the cost of benefits paid only during the contract
                     term.

                     DCAAalso took the position that the Army could not reimburse Rem-
                     ington Arms for postcontract ad hoc COLAS-for which Remington Arms
                     claimed a $21 million lump sum. DCAA’Sposition was based on a cost
                     accounting standard incorporated into the Remington Arms contract.
                     The standard requires that pension cost “be based on the provisions of
                     existing plans.” Consequently, the estimated cost of ad hoc COLASthat
                     have not yet been granted are excluded. In addition, further support can
                     be found for not recognizing postcontract ad hoc COLAS:

                   . The Financial Accounting Standards Board has concluded that it
                     is reasonable to assume that pension benefit increases granted to


                     Page 26                  GAO/AFMD-B&13DOE Contractor Pension and Health Benefits
    Appendix V
    Differing   Pocdtiona on Paying for
    Postcontract    Cost.9




    retirees-like  those granted to active employees-are intended to bene-
    fit an employer’s operations in the future rather than in the past.
l   Contributions to pension plans for future ad hoc benefit increases are
    not deductible for tax purposes.

    The Remington Arms case illustrates some of the issues that must be
    addressed by any departmental policy on postcontract retiree costs. DOD
    and DOE each has the authority to adopt the policy it believes most
    appropriate.




     Page 27                              GAO/AFMDBf&l3   DOE CbWactm   Pension and Health   Benefits
Appendix VI

DOE OIG Audit Coverageof Contractors’
Pension Costs

              From December 1986 through December 1989, the OIG made seven audits
              specifically dealing with contractor pension issues. One of those
              audits-the June 1987 review of 20 contractors, which prompted the
              Subcommittee’s request for this review-covered        various aspects of
              contractors’ pension plans, including funding policy and contract clauses
              dealing with contract expirations. The review was made by an IPA under
              the OIG'S guidance. The remaining six audits, which were made by the
              OIG or by IPAS, had more limited scopes. For example, the OIG audited
              (1) Martin Marietta’s adoption of its predecessor’s pension plan for the
              Oak Ridge site and (2) the asset balance determined during negotiations
              for the General Electric/Pinellas site-specific plan.

              In addition, IPAS hired and guided by the OIG made annual financial and
              compliance audits. Such audits are designed to express an opinion on the
              contractors’ financial statements and provide only a limited review of
              pension costs. An OIG official told us that these audits were recently dis-
              continued and would be replaced by cyclical audits of contractor func-
              tions, such as employee relations, purchasing, and security. The policy
              change was not yet in place at the sites we reviewed.




               Page 28                 GAO/AFMIMO-13 DOE Contractor Pension and Health Benefits
Appendix VII

Major Contributors to This Report


                        Lawrence R. Sullivan, Assistant Director, Cost and Regulatory
Accounting and          Accounting
Financial Management    Frank P. Rexford, Accountant-in-Charge
Division, Washington,   Donald R. Polashuk, Accountant

D.C.

1
Program Evaluation      Christopher Doyle, Actuary
and Methodology
Division

;
Atlanta Regional        Terry D. Wyatt, Evaluator
Office

J
New York Regional
Office




 (922103)                Page 29                 GAO/AFMD-90-13   DOE Contractor   Pension and Health   Benefits