A White Paper for Linton Brooks, Administrator of NNSA
Analysis of the LANL M&O
contract competition Draft RFP
with respect to pensions and benefits
17 Dec 2004
Many aspects of the draft RFP are disappointing to employees and are generating widespread fear of real loss. While the main job of the DOE Source Selection Board is to craft a contract that both it and the contractor can live with and that, is good for the national interest, the RFP should also address retention of employees that are critical to the fulfillment of the Laboratory's mission. Most employees are reading carefully the draft RFP. Older employees, who are considering retirement in the next five to ten years, as well as younger employees who could build their careers elsewhere, are finding that the draft RFP:
Does not live up to stipulations in the current DOE/UC contract;
Does not live up to promises in the DOE's Acquisition Plan for this contract;
Does not define key words and phrases whose meaning is both critical and ambiguous;
Includes clauses that could without justification force the contractor to reduce pensions and benefits to much lower levels than are currently provided after retirement from UC by capping them at 105% of those provided by a comparator group;
Is inconsistent and contradictory with respect to these clauses;
Provides no distinct funding for retiree health insurance coverage.
Current DOE/UC contract
The current DOE-UC contract says (section H.008.f.4), "DOE. agrees to require that, in the event of termination of work under the contract, a successor contractor shall permanently maintain the benefit accrual terms and conditions of UCRP for the Contractor employees transferred to the successor contractor insofar as UCRP is consistent with the provisions of applicable law." The draft RFP does not live up to this contractual requirement on the DOE.
In spite of the wording in the Acquisition Plan, viz. "The offeror must commit to... establish a pension plan that maintains the benefit accrual terms and conditions of the current UC pension plan," (which mirrors the language in the current contract) the draft RFP says no such thing.
The corresponding words in the draft RFP are (section H-36.d.1)): “The Contractor shall provide a total compensation package for all employees transferring from the predecessor contractor to this Contract with respect to salaries, health/welfare benefits, pensions comparable to that provided by the predecessor contractor as of the date the Contractor assumes responsibility for management and operation of the Laboratory. The Contractor shall maintain the base salaries of the transferring workforce. Comparability shall be determined by the Contracting Officer in his/her sole discretion."
The key terms "comparable," "comparability," and "benefits" are not defined anywhere in the draft RFP. Employees ask, "What is considered a benefit? A vending machine a quarter of a mile away?" They also ask, "Is one third `comparable'?" We will return to this question.
Capping the Benefits by 105% of a Comparator Group
The DOE has commissioned a study of benefits value in industry. The comparator group is currently defined by the Hewitt study available on the DOE web site (see references). According to it, the value of UCRP's defined benefit pension is nearly three times the average of the comparator group's. The accompanying graph, however, appears in error, because the DOE's contribution is currently zero, not 265% of the average.
The intent of the DOE in the draft RFP appears to be to reduce the value of benefits to a target of no more than 105% of the comparator group, either suddenly or gradually. The comparator group is defined in the draft RFP as "comparator companies approved by the Contracting Officer." This intent was implicitly endorsed at the all employees' meeting with representatives of the DOE's Source Selection Board on 7 Dec 2005. They shrugged when this question of intent was broached.
There is no corresponding clause requiring benefits to be maintained within at least 95% of the comparator group, so the contractor could provide much less.
clauses" that worry employees in the draft RFP state (section
When net benefit value and/or per capita cost exceed the comparator group by more than 5 percent, submit corrective action plans, when requested by the Contracting Officer, to achieve a net benefit value and per capita cost not to exceed the comparator group by more than 5 percent.
As required by the Contracting Officer, submit an analysis of the specific plan costs that are above the per capita cost range and a corrective action plan to achieve conformance with a Contracting Officer directed per capita cost range.
Implement corrective action plans determined to be reimbursable by the Contracting Officer to align employee benefit programs with the target in subparagraph (e)(2)(ii) above.
These clauses apply even
if UC is the successful bidder. They are in section
H-36.e, whereas it is section H-36.f that is replaced by H-37 if UC is the successful bidder. This RFP says that the DOE could force UC (if it wins a new contract) to reduce the value of its pensions to retiring LANL employees by nearly a factor of three.
Such forcing clauses with respect to pensions might be acceptable if the taxpayers, through DOE, were funding the pensions of LANL retirees. But they are not, and there is no reason to expect them to in the future, if the successor contractor sets up an effective defined benefit pension plan. See following section.
Note also that the average of the comparator group is not actually specified. Clause ii above could be construed as, "not to exceed the benefit value of any member of the compactor group."
Subsidization of retiree health care is not separately considered in the draft RFC, but it is of great importance to older employees. In this case the DOE is providing funding, and the cap appears reasonable. But it should not be lumped together with pensions.
Self-Funding of UCRP Pensions
Draconian reductions in pensions are not necessary, because UCRC is self-funded, with billions in assets that easily fund generous pensions for current and prospective retirees. The DOE is currently not paying into UCRP to fund deferred benefit pensions, nor are LANL employees. Since the current contract requires UCRC to transfer the "portion of the UCRC assets attributable to the Contract employees" to the DOE through a spin-off reversion transaction, and the DOE is required to transfer those assets to the successor contractor to use in establishing a new pension plan, that plan will begin with the same assets that enabled UCRC to self-fund its deferred benefit pensions. Thus the "successor contractor [can] permanently maintain the benefit accrual terms and conditions of UCRC" with this funding transferred from UCRC. All it needs to self-fund them is competent financial management of the plan assets.
Why does the RFP not simply stipulate this? If it does not, employees believe that the successor contractor will be able to subsume the "excess" plan assets for its own use through some loophole that we cannot see, leaving employees with meager or no pensions.
The Big Question for Older Employees
An employee over the age of 55 with more than 25 years of service credit stands to lose in lifetime income an amount greater than $1 million if he/she rides through the transfer to a successor contractor and his/her pension upon retirement is reduced to one third of the expected value.
It is not reasonable to expect older employees to risk a million dollars on an uninformed guess of what the Contracting Officer will consider “comparable” pension/benefits value.
Only a clear quantitative definition of “comparable” will help. Despite the above stipulation in the current DOE/UC contract for LANL, there is nothing in the draft RFP that establishes a basis for expecting the pre-transition accrued pension/benefits value to be available to any employee after the handover to a successor contractor.
Employees are caught in a squeeze between:
the approaching date of contract handover;
a lack of information about whether they should retire before the handover;
wondering whether they will be able to make an informed and timely choice;
and a lack of information on whether they will be allowed to return to work for the successor contractor if they retire.
Simply because of the uncertainties, many employees will doubtlessly choose to retire – sooner rather than later - rather than gamble their future on the good will of the DOE and the "sole discretion" of its Contracting Officer.
The panel of Source Selection Board members expressed dismay at the prospects that many employees will retire before they want to, or that employees will be forced to choose without adequate information, but there is no guarantee that these issues will be followed up. We can wait and read the final RFC, but certainty under this RFP will arrive only when the winning bidder reveals the terms and conditions of their pension and benefits offering - if any. This could be 1 October 2005 or later, when there is no longer any option to retire with a pension from UCRC.
Meanwhile many employees will go ahead and opt out, or fully prepare to do so, before they wish to and at potentially great loss to the Laboratory.
Specific Changes Suggested for the Final RFP
Section H-36.e should be put inside a clause that states it should apply only to pensions or benefits that are being funded by the taxpayers through DOE. Self-funded pension benefits should be explicitly excluded from the cap of 105% of the comparator group.
The wording of the "forcing clause" (H-36.e.2.ii) should be changed to: "When net benefit value and/or per capita cost differ from the comparator group by more than 5 percent, submit corrective action plans," etc. so that benefit value does not fall below 95% of the comparator group.
That same clause (H-36.e.2.ii) should be reworded to specify "not to exceed the average of the comparator group..." The current wording is ambiguous.
The Final RFP should take note of the assets to be provided by UCRC for a new pension plan and stipulate that the plan should "permanently maintain the benefit accrual terms and conditions of UCRC for the Contractor employees transferred to the successor contractor," as required by the current DOE/UC contract.
Unambiguous words should be added about whether, and if so, how, retirees health insurance will be subsidized.
All key terms should be quantitatively formulated. The draft RFP contains formulae in numerous places. There appears to be no reason why “comparable” in section H-36.d.1, for example, should not be defined with a formula.