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DOD contractors invest pension assets more conservatively

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Pension investment allocations of Department of Defense contractors are more conservative than those of a peer group of companies, according to new research.

The U.S. Government Accountability Office, Washington, D.C., publishes this finding in a study, “Pension Costs on DOD Contracts: Additional Guidance Needed to Ensure Costs are Consistent and Reasonable.” The GAO report finds that the tax-qualified define benefit plans of the largest DOD contractors invest in similar types of pension plan assets as their peer group, but do so more conservatively.

Aggregating the year-end 2011 pension investment allocations of the DOD contractors and their peer group shows that contractors have allocated about 7 percentage points more of their investments to generally conservative assets, namely cash and fixed-income assets, than is the case with their peer group. The DOD contractors therefore have a lower percentage of pension investments allocated to equities and “other” assets compared to their peer group, the report states.

Equities and “other” assets, such as private equity, hedge funds, real estate and commodities, are generally considered to be riskier than cash and fixed-income assets.

The GAO also finds that cost accounting standards pension costs reported by contractors grew to $4.9 billion in 2011 from less than $420 million 2002, although not all of these costs were allocated to DOD contracts.

While growth in total CAS pension costs was relatively small and gradual until 2008, costs jumped by almost $1.5 billion from 2008 (when CAS pension costs totaled $2.6 billion) to 2009 ($4 billion). CAS pension costs increased almost 90 percent in nominal dollars from 2008 to 2011, a substantial share of which was allocated to DOD contracts, the report states.

The report adds that CAS pension costs have also grown relative to total contract cost for selected weapon systems programs. Average pension costs never exceeded three percent in any year; until 2009, average pension costs never exceeded one percent.