DCAA Issues Guidance on Pension Cost Increases Due to Market Value Asset Declines

DCAA is alerting its auditors conducting forward pricing rate audits of companies with pension plans about potential unallowable costs due to the recent global stock market decline. Contractors’ defined benefit positions may have become underfunded or barely funded causing an increase in annual contributions to the funds. Auditors are told to reach out to the DCAA pension specialists when significant pension plan costs are included in a proposal and be aware of three areas:

1. Auditors should question increased pension costs resulting from the contractor’s use of an interest rate lower than the assumed long-term rate of return when computing the present value of pension liabilities and in estimating the return on pension plan assets. Auditors are reminded that CAS 412.50(b)(4) requires contractors to use the long term rate of return to avoid distortions cause by short term fluctuations. Auditors are told that the use of the long term rate is required to determine if pension costs are subject to the assignable cost limitation – if the actuarial value of the plan assets exceeds actuarial accrued liability plus normal costs then no pension costs are allocable to government contracts.

2. Auditors should question the contractor’s immediate expensing of investment losses in 2008. The guidance states these losses represent actuarial losses that are required to be amortized over 15 years so the contractor’s projected pension cost should include only one-fifteenth of these pension losses per year.

3. Auditors should be aware that some contractors average pension asset value over a three to six year average in which case the impact of recent declines should be mitigated. If the contractor uses a different asset valuation auditors are told to seek expert advice on the change. They are also reminded that if a new method is acceptable, it must be considered a voluntary accounting change in accordance with FAR 52.230-2 which prohibits any increased costs paid by the government (09-PAC-007(R).

{TAG_FORM_TITLE}