Eversource 2005 Annual Report Download - page 74

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72
The $63.6 million reduction in the plan’s obligation that is included in the curtailment/impact of plan changes relates to the reduction in the future
years of service expected to be rendered by plan participants. This reduction is the result of the transition of employees into the new 401(k)
benefit and the company’s decision to pursue a fundamentally different business strategy, and align the structure of the company to support this
business strategy. This overall reduction in plan obligation serves to reduce the previously unrecognized actuarial losses.
The company amortizes its unrecognized transition obligation over the remaining service lives of its employees as calculated on an individual
operating company basis. The company amortizes the unrecognized prior service cost and unrecognized net loss over the remaining service lives
of its employees as calculated on a company-wide basis.
The accumulated benefit obligation for the Pension Plan was $2.061 billion and $1.850 billion at December 31, 2005 and 2004, respectively.
The following actuarial assumptions were used in calculating the plans’ year end funded status:
At December 31,
Pension Benefits Postretirement Benefits
Balance Sheets 2005 2004 2005 2004
Discount rate 5.80% 6.00% 5.65% 5.50%
Compensation/progression rate 4.00% 4.00% N/A N/A
Health care cost trend rate N/A N/A 7.00% 8.00%
The components of net periodic expense/(income) are as follows:
For the Years Ended December 31,
Pension Benefits Postretirement Benefits
(Millions of Dollars) 2005 2004 2003 2005 2004 2003
Service cost $48.7 $40.7 $ 35.1 $8.0 $6.0 $ 5.3
Interest cost 125.6 118.9 117.0 25.2 25.3 26.8
Expected return on plan assets (172.0) (175.1) (182.5) (12.3) (12.5) (14.9)
Amortization of unrecognized net transition (asset)/obligation (0.3) (1.5) (1.5) 11.8 11.9 11.9
Amortization of prior service cost 7.1 7.2 7.2 (0.4) (0.4) (0.4)
Amortization of actuarial loss/(gain) 33.4 15.7 (7.1) —— —
Other amortization, net —— — 17.5 11.4 6.4
Net periodic expense/(income) – before curtailments and
termination benefits 42.5 5.9 (31.8) 49.8 41.7 35.1
Curtailment expense 8.9 — — 3.7 — —
Termination benefits expense 2.8 2.1 — 0.5 — —
Total curtailments and termination benefits 11.7 2.1 — 4.2 — —
Total – net periodic expense/(income) $54.2 $8.0 $(31.8) $54.0 $41.7 $35.1
For calculating pension and postretirement benefit expense and income amounts, the following assumptions were used:
For the Years Ended December 31,
Pension Benefits Postretirement Benefits
Statements of Income 2005 2004 2003 2005 2004 2003
Discount rate 6.00% 6.25% 6.75% 5.50% 6.25% 6.75%
Expected long-term rate of return 8.75% 8.75% 8.75% N/A N/A N/A
Compensation/progression rate 4.00% 3.75% 4.00% 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% 6.85%
Life assets and non-taxable health assets N/A N/A N/A 8.75% 8.75% 8.75%
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,
2005 2004
Health care cost trend rate
assumed for next year 10.00% 7.00%
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 2011 2007
At December 31, 2004, the health carecost trend assumption was
assumed to decrease by one percentage point each year through 2007.
For December 31, 2005 disclosure purposes, the health care cost
trend assumption was reset for 2006 at 10 percent, decreasing one
percentage point per year to an ultimate rate of 5 percent in 2011.
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 $ 0.9 $ (0.8)
Effect on postretirement
benefit obligation $18.0 $(15.6)
NU’sinvestment 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 routinely reviewed and periodically rebalanced.