Opportunities for Improving Army Oversight of Pension Plans at Government-Owned, Contractor-Operated Ammunition Plants

PSAD-78-85: Published: Apr 18, 1978. Publicly Released: Apr 18, 1978.

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The Army Armament Command manages a complex of 25 government-owned, contractor-operated (GOCO) ammunition plants. The contractors are responsible for employing the work force and establishing wage rates, pension programs, and other fringe benefits. About 48 pension plans covered eligible employees at 21 GOCO ammunition plants; there were no pension plans at the remaining 4 plants. The government's share of pension plan contributions at all the plants since the plans began has exceeded $100 million.

One of the primary causes of the government's making excess contributions to contractors' pension funds at GOCO plants has been the large reductions in employment levels before employees attained vested rights to pension benefits. These reductions resulted in abnormal termination gains representing excess credits due the government. To avoid making excess contributions, the Army used a deferred funding procedure in some cases. Because this procedure is now considered inconsistent with the Employee Retirement Income Security Act of 1974, another funding technique is required. The use of unrealistic actuarial assumptions and other questionable pension plan practices by the contractors generally resulted in increased pension plan costs to the government. There was no specific provision in the Armed Services Procurement Regulations on the use of actuarial assumptions except for dealing with abnormal terminations and valuation of pension fund assets. The Army was not effectively monitoring and evaluating contractor pension programs because it did not require sufficient data or adequately review data, and it lacked skilled staff.

Recommendation for Executive Action

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: Army contracting personnel should: (1) see that GOCO contractors use employee termination assumptions sufficiently high to prevent abnormal termination gains; (2) determine and recover the credit amounts due the government from significant contractor employment reductions; (3) use advance agreements under present and future GOCO contracts to require government determination and recoupment of credit due because of excess employee terminations, provide for orderly transfer of pension plan assets for transferred employees, and provide for recovery of excess contributions when contracts are terminated; and (4) check to see that contractors follow applicable cost accounting and procurement regulations. The Army should develop an effective system to review, monitor, and evaluate pension plan practices of contractors and explore the use of Defense Contract Administration Services specialists to support monitoring functions.

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