Under its business model, DOE reimburses contractors for the allowable  costs of employee compensation, including benefits such as pension and  other postretirement benefits. 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. As a result, DOE  ultimately bears the investment risk incurred by the contractor sponsoring the plan. In addition, changes in the interest rate can significantly affect contractor pension contributions. Changes in economic conditions can also affect other postretirement  benefit costs. 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. 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. 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. Moreover, DOE has not added information to its budget  request on its contractors’ nonpension postretirement benefit costs. 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. 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. In addition, DOE’s existing process is incomplete for correcting contractor  benefit packages that exceed its reimbursement standard. 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. 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. 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. 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. 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.
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.