The Pension Benefit Guaranty Corp. (PBGC) may lose the institutional knowledge it needs to manage contractors if it continues to rely so heavily on contractors to manage core functions.

The U.S. Government Accountability Office (GAO) makes that case in a report on PBGC contracting that was prepared at the request of Sen. Charles Grassley, R-Iowa.

PBGC has been relying heavily on contractors since the mid-1980s, when it coped with a surge in pension plan failures by hiring contractors, Barbara Bovbjerg, a GAO managing director, and William Woods, a GAO director, write in a letter summarizing the GAO’s findings.

The PBGC is supposed to use outside investment managers to prevent government employees from affecting private companies and the financial markets, and budget constraints have limited the ability of the PBGC to hire full-time employees, the GAO officials say.

The Office of Personnel Management (OPM) imposed new review procedures on the PBGC hiring process during a 12-month period that started in June 2008, and that also affected hiring, officials say.

Some PBGC departments have started hiring in the past two years, and the number of “on-board full-time employees” increased to 955 as of October 2010, compared with an allotment of 941, officials say.

Despite the increase in the number of full-time employees, the PBGC still spends about 80% of its budget on contracts.

“Over time, such heavy reliance on contractors may be placing PBGC at risk of diminishing management control over contract activities and decreasing the level of expertise among its federal employees,” officials say.

The PBGC runs the risk of ceding core functions, such as the ability to perform actuarial services, to the contractor workforce, officials say.

PBGC officials told the GAO that some departments use contractors for specialized legal, information technology and actuarial work.

One PBGC official told the GAO “it is general agency practice to have software design and development work done by contractors, as it is difficult to keep skilled software engineers on staff as government employees.”

The PBGC was using 337 software engineering services contractors in fiscal year 2010.

In a review of specific contracts, the GAO officials note that two of the PBGC’s contractors include Hewitt Associates, which is now part of Aon Corp., Chicago (NYSE:AON), and Milliman Inc., Seattle.

Hewitt has a 5-year pension administration actuarial support services contract that had an estimated total value of about $46 million when the contract was awarded, officials say.

Milliman has a 5-year contract to provide actuarial support services in “support of the mitigation of risks to the PBGC pension insurance program.” That contract had an initial estimated total value of about $3.8 million.

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