Eversource 2004 Annual Report Download - page 71

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For calculating pension and postretirement benefit income and expense amounts, the following assumptions were used:
For the Years Ended December 31,
Pension Benefits Postretirement Benefits
Statements of Income 2004 2003 2002 2004 2003 2002
Discount rate 6.25% 6.75% 7.25% 6.25% 6.75% 7.25%
Expected long-term rate of return 8.75% 8.75% 9.25% N/A N/A N/A
Compensation/progression rate 3.75% 4.00% 4.25% N/A N/A N/A
Expected long-term rate of return —
Health assets, net of tax N/A N/A N/A 6.85% 6.85% 7.25%
Life assets and non-taxable health assets N/A N/A N/A 8.75% 8.75% 9.25%
The following table represents the PBOP assumed health care cost
trend rate for the next year and the assumed ultimate trend rate:
Year Following December 31,
2004 2003
Health care cost trend rate
assumed for next year 7.00% 8.00%
Rate to which health care cost
trend rate is assumed to
decline (the ultimate trend rate) 5.00% 5.00%
Year that the rate reaches the
ultimate trend rate 2007 2007
The annual per capita cost of covered health care benefits was assumed
to decrease by one percentage point each year through 2007.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. The effect of changing the
assumed health care cost trend rate by one percentage point in each
year would have the following effects:
One Percentage One Percentage
(Millions of Dollars) Point Increase Point Decrease
Effect on total service and
interest cost components $ 1.0 $ (0.8)
Effect on postretirement
benefit obligation $15.1 $(13.3)
NU’s investment strategy for its Pension Plan and PBOP Plan is to
maximize the long-term rate of return on those plans’ assets within an
acceptable level of risk. The investment strategy establishes target
allocations, which are regularly reviewed and periodically rebalanced.
NU’s expected long-term rates of return on Pension Plan assets and
PBOP Plan assets are based on these target asset allocation assumptions
and related expected long-term rates of return. In developing its expected
long-term rate of return assumptions for the Pension Plan and the
PBOP Plan, NU also evaluated input from actuaries and consultants, as
well as long-term inflation assumptions and NU’s historical 20-year
compounded return of approximately 11 percent. The Pension Plan’s
and PBOP Plan’s target asset allocation assumptions and expected
long-term rate of return assumptions by asset category are as follows:
At December 31,
Pension Benefits Postretirement Benefits
2004 and 2003 2004 and 2003
Target Assumed Target Assumed
Asset Rate of Asset Rate of
Asset Category Allocation Return Allocation Return
Equity securities:
United States 45% 9.25% 55% 9.25%
Non-United States 14% 9.25% 11% 9.25%
Emerging markets 3% 10.25% 2% 10.25%
Private 8% 14.25% ——
Debt Securities:
Fixed income 20% 5.50% 27% 5.50%
High yield fixed income 5% 7.50% 5% 7.50%
Real estate 5% 7.50% ——
The actual asset allocations at December 31, 2004 and 2003, approximated
these target asset allocations. The plans’ actual weighted-average asset
allocations by asset category are as follows:
At December 31,
Pension Benefits Postretirement Benefits
Asset Category 2004 2003 2004 2003
Equity securities:
United States 47% 47% 55% 59%
Non-United States 17% 18% 14% 12%
Emerging markets 3% 3% 1% 1%
Private 4% 3% ——
Debt Securities:
Fixed income 19% 19% 28% 25%
High yield fixed income 5% 5% 2% 3%
Real estate 5% 5% ——
Total 100% 100% 100% 100%
Estimated Future Benefit Payments: The following benefit payments, which
reflect expected future service, are expected to be paid for the Pension
and PBOP Plans:
(Millions of Dollars)
Pension Postretirement Government
Year Benefits Benefits Subsidy
2005 $107.5 $ 39.5 $ —
2006 109.9 40.3 2.3
2007 112.9 40.8 2.3
2008 116.2 40.1 2.3
2009 120.0 39.4 2.2
2010–2014 685.5 186.4 10.4
Government subsidy represents amounts expected to be received from
the federal government for the new Medicare prescription drug benefit
under the PBOP Plan.