Review of Unfunded Pension Costs of Aetna Life and Casualty Company

This final report provides the results of our review of Unfunded Pension Costs of Aetna Life and Casualty Company (Aetna). During our previous review of Aetna (CIN A-07-93-00679), we determined that the Medicare segment accumulated $4,455,857 in unfunded pension costs as of January 1, 1991. We recommended that Aetna identify those unfunded pension costs as an unallowable component of subsequent years' pension cost calculations. We also recommended that Aetna update the accumulated unfunded pension costs, and identify and track similar costs occurring in later years.

Our current review showed that Aetna did identify and update the accumulated unfunded pension costs from 1991 through 1995. Additionally, Aetna identified and tracked additional unfunded pension costs for years 1991 through 1995. However, we determined that Aetna understated its accumulated unfunded pension costs by $1,407,689 as of January 1, 1996. The understatement occurred because Aetna incorrectly began amortizing the accumulated unfunded costs as a component of the Medicare segment's pension costs in 1995.

We recommend that Aetna increase the January 1, 1996 accumulated unfunded pension costs of the Medicare segment by $1,407,689. We also recommended that Aetna obtain approval of its contracting officer before including any portion of the accumulated unfunded costs as a component of the Medicare segment's pension costs.