1. 1 ANPRM on CAS Harmonization with PPA November 2008

2. 2 Pension Regulations ERISA (amended by PPA in 2006) –Measures pensions to determine amounts to contribute to pension trust –Moved to a short term approach FASB 87 –Measures pensions to determine pension amounts recorded for financial reporting –Moved to a short term approach CAS –Measures pension to determine amount of cost recoverable in government contracts –Long term approach

3. 3 Current CAS v. PPA Considerations Contractor cash flow negatively impacted –PPA requires higher contributions to fund pension trust CAS prepayment growth –CAS cost recovery slower Lower liability measurement Long (10-30 year) amortization periods PPA close ties to the market significantly increased volatility of funding measure PPA effective for most contractors in 2008, a few large contractors have a deferral to 2010 PPA mandates harmonization of CAS with the PPA minimum funding requirement by 2010 –Publication must be by 1/1/2010 and rule must be effective by 1/1/2011

4. 4 Concepts in Harmonization ANPRM CAS pension costs will increase –Liability is now greater of two measures (current AAL or new MAL) –Prepayment credits divided into two categories Mandatory (funding in excess of CAS cost up to PPA min) –Amortized over 5 years Voluntary (discretionary funding in excess of PPA min) –Actuarial gains/losses amortized over 10 years from 15 Assignable cost limit (ACL) changed to reduce the frequency of entering and exiting full funding (volatility) Transition rules conservatively phase in increased cost

5. 5 Concerns with the ANPRM Cost recovery tied to contractor funding patterns –ANPRM “Minimum required funding” is PPA reduced by ERISA credits –PPA “minimum required funding” not reduced by ERISA credits –Minimum required funding amount baseline for mandatory prepayment –Discretionary v. Mandatory funding Assignable Cost Limitation –Revised to be 125% of AAL, but explicitly ignores MAL Effective Date and Applicability –PPA funding v. Cost recovery

6. 6 Cost recovery tied to funding patterns Contractors with same PPA funding requirements and funding amounts over the same period have different cost recovery Contractor 1 Early Funding Contractor 4 Later Funding Year 1 PPA Min Req Fund $100 (before ERISA Cr) Contributes $600 ERISA Cr $0 Man PP $100 Vol PP $500 Contributes $100 ERISA Cr $0 Man PP $100 Vol PP $0 Year 2 PPA Min Req Fund $200 (before ERISA Cr) Contributes $0 ERISA Cr $500 ($200 applied) Man PP $100 Vol PP $500 Contributes $200 ERISA Cr $0 Man PP $100+200=300 Vol PP $0 Year 3 PPA Min Req Fund $300 (before ERISA Cr) Contributes $0 ERISA Cr $300 ($300 applied) Man PP $100 Vol PP $500 Contributes $300 ERISA Cr $0 Man PP $300+300=600 Vol PP $0

7. 7 Cost recovery tied to funding patterns Contractors with same PPA funding requirements and funding amounts over the same period have different cost recovery Contractor 2 Med Fund Later ERISA Cr use Contractor 3 Med Fund Early ERISA Cr use Year 1 PPA Min Req Fund $100 (before ERISA Cr) Contributes $300 ERISA Cr $0 Man PP $100 Vol PP $200 Contributes $300 ERISA Cr $0 Man PP $100 Vol PP $200 Year 2 PPA Min Req Fund $200 (before ERISA Cr) Contributes $200 ERISA Cr $200 (None applied) Man PP $100 Vol PP $200+200=400 Contributes $0 ERISA Cr $200 ($200 applied) Man PP $100 Vol PP $200 Year 3 PPA Min Req Fund $300 (before ERISA Cr) Contributes $100 ERISA Cr $200 ($200 applied) Man PP $100+100=200 Vol $400 Contributes $300 ERISA Cr $0 Man PP $100+300=400 Vol PP $200

8. 8 Cost recovery tied to funding patterns Recommended two changes to ANPRM to provide for fair and equitable cost recovery: 1.Minimum Required Funding definition for CAS should not be reduced by ERISA credits 2.When ERISA credits are used as a funding source to satisfy the PPA minimum funding required (i.e. the assets become mandatory contributions and are no longer discretionary), a corresponding reclassification from CAS voluntary prepayments to CAS mandatory prepayments should be made

9. 9 Assignable Cost Limitation Revised to use 125% of AAL, but explicitly ignores MAL ACL intended to prevent excessive buildup of assets that have funded CAS costs ANPRM uses higher of AAL or MAL to calculate CAS pension costs Ignoring MAL illogical based on intent of ACL Recommended ACL use greater of 125% AAL or 100% MAL

10. 10 Effective Date and Applicability PPA mandates CASB issue rule by 1/1/2010, rule effective by 1/1/2011 Final rule expected to be effective immediately in 2009 when published If receipt of new CAS covered contract in 2009, rule applicable to contracts as of 1/1/2010 (start of next cost accounting period) PPA funding requirements become effective for eligible contractors the earlier of: –Beginning of next fiscal year after effective date of the harmonized rule (i.e. if CAS rule out in 2009, eligible contractors must fund in 2010), or –January 1, 2011 If CAS rule out too late in 2009 to get new contract in 2009 (i.e. new contract receipt in 2010), CAS applicability would be 1/1/2011 but eligible contractors would be subject to PPA funding in 2010 if CAS effective immediately in 2009 Recommended the CAS Board be aware of the potential problems with publishing a final harmonized rule too close to the end of 2009 and consider an effective date of January 2, 2010 for the final rule if necessary

11. 11 Conclusion ANPRM positive move toward harmonization ANPRM reasonable balance between timely cost recovery and acceptable volatility Conservative transition rules acceptable Consider the availability of contract funding for increased costs and equitable adjustments in current economic conditions