A&D Pension Fund Analysis

As a result of the 2008 financial crisis the federal government passed the Employee Retirement Income Security Act (ERISA) http://webapps.dol.gov/elaws/elg/erisa.htm , which ensures that employee benefit plans are established or maintained in a fair and financially sound manner. In addition, employers have an obligation to provide promised benefits and satisfy ERISA’s requirements for managing and administering private retirement and welfare plans. Consequently legacy A&D companies have a fiduciary responsibility to make significant contributions to employee’s pension funds. Pension fund contributions have a significant impact on the retirement plan component of Fringe. Knowing competitor’s pension fund strategy allows ARDAK’s clients to maintain a significant competitive advantage.

General Assumptions and Methodology

Analysis is performed utilizing ARDAK’s proprietary Rate Derivation (RD) methodology and public domain financial data. Wrap rates were developed for each of competitor, with Low Level Decompositions performed to determine the retirement contribution to fringe. The retirement contribution to fringe was then factored by the estimated retirement funding profiles to predict the retirement contribution to fringe’s effect on future wrap rates.

Key factors in the analysis include:

Baseline Retirement Fringe – Determined through competitor wrap rate low level decomposition
Rate of plan fair value increase – Determined through the lessor of recent historical analysis (exclusive of outliers) and competitor estimates in the public domain
Rate of plan obligation increase – Determined through the lessor of recent historical analysis (exclusive of outliers) and competitor estimates in the public domain

Key assumptions in the analysis include:

Linear appreciation of both plan fair value and projected plan obligations
All wrap rate factors exclusive of retirement contribution to fringe remain constant (highly unlikely, especially in the out years)
Projected required contributions calculated based on revolving 7-year harmonization

GD Advanced Information Systems Pension Analysis (Past State)

Historical analysis of the General Dynamics retirement plan financials shows that retirement contributions have been gradually increasing subsequent to the plan suffering approximately 35% loss in value between 2007 and 2008 attributable to the reduction in equity values associated with the global financial crises. Consequently, pension harmonization payments have been necessary to conform to funding requirements specified by the Pension Protection Act of 2006 (PPA). Most recently, contributions demonstrate moderate increase.

GD Advanced Information Systems Pension Analysis

GD Advanced Information Systems Pension Analysis Factors

Utilizing the aforementioned data as a base, ARDAK has performed an analysis of the potential effect of future retirement obligations and contributions on the overall GD AIS wrap rate. The analysis of GD’s retirement contribution is based upon the following factors:

The baseline retirement fringe was determined through Wrap Rate Analysis Low Level Decomposition. The Direct Labor Rate increase was accepted from the 2012 GD 10-K. The rate of retirement plan value increase was accepted from the 2012 GD 10-K. The rate of retirement plan obligation increase was calculated based on the previous four years’ rate of obligation increase.

Utilizing these factors, the following GD AIS pension states are predicted:

GD Advanced Information Systems Pension Analysis (Future State)

GD Advanced Information Systems Pension Analysis (Future State)

If all other factors remain consistent (somewhat unlikely) the following table depicts an estimate of the projected GD AIS wrap rates: