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Energy Dept. Limits Contractor Reimbursements to Defined-contribution Costs

May 2, 2006
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A decision by the Energy Department to reimburse only defined-contribution pension and medical benefits for newly hired contract workers has stunned policy experts, with many criticizing the Bush administration for sending the wrong signal to the private sector and wondering which agency might be next in line.

In an April 27 announcement, the Energy Department said that it is attempting to "improve the predictability of contractor benefit costs and mitigate the growth of the department’s liabilities for these costs" in a way that is "consistent with market trends."

The move sparked criticism.

"This is a shocking attack on the defined-benefit pension system by the administration," says Ethan Kra, chief actuary for retirement at Mercer Human Resource Consulting. "This came out of left field with no opportunity for comment. This was just an edict."

The decision, according to one expert, reflects a bias by President Bush against traditional benefit programs and in favor of personal accounts, such as those he has proposed for Social Security and health savings.

"The Bush administration has been quite clear and candid that they don’t care whether employers have defined-benefit plans and that in their view individual plans are better for workers," says Dallas Salisbury, president and CEO of the Employee Benefit Research Institute. "The question is, is the Defense Department next?"

The Office of Management and Budget was not able to say as of May 1 whether other government agencies would follow Energy’s lead.

Even if the agency is acting alone, it is overstepping its bounds, say experts, who argue that contractors should be free to choose a benefits program as long as they hold down costs.

"I was stunned because it seems to me that there is no justification whatsoever for DoE to dictate to a provider what type of benefits they should be offering," says Martha Priddy Patterson, a director of Deloitte Consulting in Washington. "Where does this end? Will they not reimburse your medical plan if it covers contraceptives or cosmetic surgery?"

One critic asserts that it is hypocritical for the agency to deny defined-benefit reimbursements to contractors.

"Meanwhile, U.S. government workers themselves retain a rich, secure pension plan," Sylvester Schieber, director of U.S. benefits consulting at Watson Wyatt, said in a statement.

An Energy Department spokeswoman said that agency would continue to reimburse defined benefits for contractor retirees and the approximately 200,000 current workers.

The announcement, coming at a delicate time in protracted House and Senate negotiations over pension legislation, provides a cudgel for Bush’s political opponents.

"It shows that the administration is not only acquiescing in the idea that the days of the traditional pension are over, but is actively supporting the result," Rep. George Miller, D-California, ranking member of the House Education and the Workforce Committee, said in a statement.

It also could have influence outside the Beltway.

"This just further underlines for the private sector, at least while this administration is in power, that they can’t expect to be criticized for getting rid of their defined-benefit plans," Salisbury says.

--Mark Schoeff Jr.

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