APS 2015 Annual Report Download - page 125

Table of Contents
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In October 2014, the Society of Actuaries’ Retirement Plans Experience Committee issued its final reports on its recommended
mortality basis (“RP-2014 Mortality Tables Report” and "Mortality Improvement Scale MP-2014 Report"). At December 31, 2014, we
updated our mortality assumptions using the recommended basis with modifications to better reflect our plan experience and additional
data regarding mortality trends. The updated mortality assumptions resulted in a $67 million increase in Pinnacle West’s pension and
other postretirement obligations, which was offset by the related regulatory asset, regulatory liability and accumulated other
comprehensive income.
In selecting our healthcare trend rates, we consider past performance and forecasts of healthcare costs. A one percentage point
change in the assumed initial and ultimate healthcare cost trend rates would have the following effects (dollars in thousands):
1% Increase
1% Decrease
Effect on other postretirement benefits expense, after consideration of amounts capitalized or billed to electric
plant participants $ 8,834
$ (5,890)
Effect on service and interest cost components of net periodic other postretirement benefit costs 9,069
(6,949)
Effect on the accumulated other postretirement benefit obligation 100,322
(80,332)
Plan Assets
The Board of Directors has delegated oversight of the pension and other postretirement benefit plans’ assets to an Investment
Management Committee (“Committee”). The Committee has adopted investment policy statements (“IPS”) for the pension and the
other postretirement benefit plans’ assets. The investment strategies for these plans include external management of plan assets, and
prohibition of investments in Pinnacle West securities.
The overall strategy of the pension plan’s IPS is to achieve an adequate level of trust assets relative to the benefit obligations.
To achieve this objective, the plan’s investment policy provides for mixes of investments including long-term fixed income assets and
return-generating assets. The target allocation between return-generating and long-term fixed income assets is defined in the IPS and is
a function of the plan’s funded status. The plan’s funded status is reviewed on at least a monthly basis.
Long-term fixed income assets, also known as liability-hedging assets, are designed to offset changes in the benefit obligations
due to changes in interest rates. Long-term fixed income assets consist primarily of fixed income debt securities issued by the U.S.
Treasury, other government agencies, and corporations. Long-term fixed income assets may also include interest rate swaps, U.S.
Treasury futures and other instruments.
Return-generating assets are intended to provide a reasonable long-term rate of investment return with a prudent level of
volatility. Return-generating assets are composed of U.S. equities, international equities, and alternative investments. International
equities include investments in both developed and emerging markets. Alternative investments include investments in real estate,
private equity and various other strategies. The plan may hold investments in return-generating assets by holding securities in
partnerships and common and collective trusts.
Based on the IPS, and given the pension plan’s funded status at year-end 2015, the long-term fixed income assets had a target
allocation of 58% with a permissible range of 55% to 61% and the return-generating assets had a target allocation of 42% with a
permissible range of 39% to 45%. The return-generating assets have additional target allocations, as a percent of total plan assets, of
22% equities in U.S. and other developed markets, 6% equities in emerging markets, and 14% in alternative investments. The pension
plan IPS does not
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