Allegheny Power 2014 Annual Report Download - page 89

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3. PENSION AND OTHER POSTEMPLOYMENT BENEFITS
FirstEnergy provides noncontributory qualified defined benefit pension plans that cover substantially all of its employees and non-
qualified pension plans that cover certain employees. The plans provide defined benefits based on years of service and compensation
levels. In addition, FirstEnergy provides a minimum amount of noncontributory life insurance to retired employees in addition to
optional contributory insurance. Health care benefits, which include certain employee contributions, deductibles and co-payments,
are also available upon retirement to certain employees, their dependents and, under certain circumstances, their survivors.
FirstEnergy recognizes the expected cost of providing pension and OPEB to employees and their beneficiaries and covered
dependents from the time employees are hired until they become eligible to receive those benefits. FirstEnergy also has obligations
to former or inactive employees after employment, but before retirement, for disability-related benefits. On August 25, 2014, the
qualified pension plan was amended authorizing a voluntary cashout window program for certain eligible terminated participants
with vested benefits. Eligible terminated participants were able to elect an immediate lump sum cash payment of their vested
benefits. Additionally, annuity options were offered and could be elected instead of the lump sum cash payment. The election period
was September 15, 2014 to October 31, 2014. Payment of benefits for participants that elected an immediate lump sum cash
payment or an annuity commenced on December 1, 2014 which resulted in a $40 million reduction to the underfunded status of
the pension plan. Additionally, during 2014, certain unions ratified their labor agreements that ended subsidized retiree health care
resulting in a reduction to the OPEB benefit obligation by approximately $97 million.
FirstEnergy recognizes as a pension and OPEB mark-to-market adjustment the change in the fair value of plan assets and net
actuarial gains and losses annually in the fourth quarter of each fiscal year and whenever a plan is determined to qualify for a
remeasurement. The remaining components of pension and OPEB expense, primarily service costs, interest on obligations, assumed
return on assets and prior service costs, are recorded on a monthly basis. The pension and OPEB mark-to-market adjustment for
the years ended December 31, 2014, 2013, and 2012 were $1,243 million ($835 million net of amounts capitalized), $(396) million
($(256) million net of amounts capitalized), and $875 million ($609 million net of amounts capitalized), respectively. In 2014, the
pension and OPEB mark-to-market adjustment primarily reflects a 75 basis point decline in the discount rate, revisions to mortality
assumptions extending the expected life in key demographics as further described below, lower than expected asset returns, and
changes in other demographic assumptions.
FirstEnergy’s pension and OPEB funding policy is based on actuarial computations using the projected unit credit method. During
the year ended December 31, 2014, FirstEnergy did not make any contributions to its qualified pension plan. FirstEnergy expects
to contribute $143 million to its qualified pension plan in 2015. Pension and OPEB costs are affected by employee demographics
(including age, compensation levels and employment periods), the level of contributions made to the plans and earnings on plan
assets. Pension and OPEB costs may also be affected by changes in key assumptions, including anticipated rates of return on
plan assets, the discount rates and health care trend rates used in determining the projected benefit obligations for pension and
OPEB costs. FirstEnergy uses a December 31 measurement date for its pension and OPEB plans. The fair value of the plan assets
represents the actual market value as of the measurement date.
FirstEnergy’s assumed rate of return on pension plan assets considers historical market returns and economic forecasts for the
types of investments held by the pension trusts. In 2014, FirstEnergy’s qualified pension and OPEB plan assets earned $387 million
or 6.2% compared to losses of $(22) million, or (0.3)% in 2013 and assumed a 7.75% rate of return for both years on plan assets
which generated $496 million and $535 million of expected returns on plan assets, respectively. The expected return on pension
and OPEB assets is based on the trusts’ asset allocation targets and the historical performance of risk-based and fixed income
securities. The gains or losses generated as a result of the difference between expected and actual returns on plan assets will
increase or decrease future net periodic pension and OPEB cost as the difference is recognized annually in the fourth quarter of
each fiscal year or whenever a plan is determined to qualify for remeasurement.
During 2014, the Society of Actuaries published new mortality tables and improvement scales reflecting improved life expectancies
and an expectation that the trend will continue. An analysis of FirstEnergy pension and OPEB plan mortality data indicated the use
of the RP2000 mortality table with projection scale BB2D was most appropriate. As such, the RP2000 mortality table with projection
scale BB2D was utilized to determine the 2014 benefit cost and obligation as of December 31, 2014 for the FirstEnergy pension
and OPEB plans. The impact of using the RP2000 mortality table with projection scale BB2D resulted in an increase in the projected
benefit obligation of $373 million and $21 million for the pension and OPEB plans, respectively, and was included in the 2014
pension and OPEB mark-to-market adjustment.