Exelon 2014 Annual Report Download - page 66

For the majority of pension plan assets, Exelon uses a calculated value that adjusts for 20% of the difference between fair value and
expected MRV of plan assets. Use of this calculated value approach enables less volatile expected asset returns to be recognized
as a component of pension cost from year to year. For other postretirement benefit plan assets and certain pension plan assets,
Exelon uses fair value to calculate the MRV.
Actual asset returns have an impact on the costs reported for the Exelon-sponsored pension and other postretirement benefit plans.
The actual asset returns across the Registrants’ pension and other postretirement benefit plans for the year ended December 31,
2014 were 10.93% and 5.01%, respectively, compared to an expected long-term return assumption of 7.00% and 6.59%, respectively.
Discount Rate. The discount rates used to determine the majority pension and other postretirement benefit obligations were 3.94%
and 3.92%, respectively, at December 31, 2014. The discount rates at December 31, 2014 represent weighted-average rates for the
majority of pension and other postretirement benefit plans. At December 31, 2014 and 2013, the discount rates were determined by
developing a spot rate curve based on the yield to maturity of a universe of high-quality non-callable (or callable with make whole
provisions) bonds with similar maturities to the related pension and other postretirement benefit obligations. The spot rates are used
to discount the estimated distributions under the pension and other postretirement benefit plans. The discount rate is the single level
rate that produces the same result as the spot rate curve. Exelon utilizes an analytical tool developed by its actuaries to determine
the discount rates.
The discount rate assumptions used to determine the obligation at year end are used to determine the cost for the following year.
Exelon used discount rates ranging from 3.94% and 3.92% to estimate the majority its 2015 pension and other postretirement benefit
costs, respectively.
Health Care Reform Legislation. In March 2010, the Health Care Reform Acts (the Acts) were signed into law. The Acts include a
provision that imposes an excise tax on certain high-cost plans beginning in 2018, whereby premiums paid over a prescribed
threshold will be taxed at a 40% rate. Although the excise tax does not go into effect until 2018, accounting guidance requires Exelon
to incorporate the estimated impact of the excise tax in its annual actuarial valuation. The application of the legislation is still unclear
and Exelon continues to monitor the Department of Labor and IRS for additional guidance. Effective in 2002, Constellation amended
its other postretirement benefit plans for all subsidiaries other than Nine Mile Point by capping retiree medical coverage for future
retirees who were under the age of 55 on January 1, 2002 at 2002 levels. Therefore, the excise tax is not expected to have a
material impact on the legacy Constellation other postretirement benefit plans. Although Exelon has capped the rate of claims growth
for certain legacy Exelon plan participants over age 65, exposure to the excise tax remains. Certain key assumptions are required to
estimate the impact of the excise tax on the other postretirement obligation for legacy Exelon plans, including projected inflation
rates (based on the CPI), and under what circumstances pre- and post-65 retiree benefits can be aggregated in determining the
premium values of health care benefits. Exelon reflected its best estimate of the expected impact in its annual actuarial valuation.
Health Care Cost Trend Rate. Assumed health care cost trend rates impact the costs reported for Exelon’s other postretirement
benefit plans for participant populations with plan designs that do not have a cap on cost growth. Accounting guidance requires that
annual health care cost estimates be developed using past and present health care cost trends (both for Exelon and across the
broader economy), as well as expectations of health care cost escalation, changes in health care utilization and delivery patterns,
technological advances and changes in the health status of plan participants. Therefore, the trend rate assumption is subject to
significant uncertainty. Exelon assumed an initial health care cost trend rate of 6.00% for 2014, decreasing to an ultimate health care
cost trend rate of 5.00% in 2017.
Mortality. The mortality assumption is composed of a base table that represents the current expectation of life expectancy of the
population adjusted by an improvement scale that attempts to anticipate future improvements in life expectancy. Exelon historically
used a mortality base table for its accounting valuation that is consistent with the IRS required table for funding (referred to as RP-
2000) and its corresponding improvement scale. During 2014, the Society of Actuaries (SOA) issued an updated mortality table
(referred to as RP-2014) and improvement scale that suggests significant mortality improvement over the prior table. Exelon has a
substantial employee population that provides a credible basis for mortality evaluation. Exelon engaged its actuaries to conduct a
mortality study of Exelon’s actual experience over a five year period as compared to the RP-2000 and RP-2014 tables, which
resulted in a determination that the RP-2000 more closely aligns with Exelon’s actual mortality experience. The study also
considered available improvement scales. Management concluded that the RP-2000 and a more recent improvement scale issued
by the SOA with certain adjustments to long-term improvement rates represent its best estimate of mortality. Exelon is utilizing the
Scale BB 2-Dimensional improvement scale with long-term improvements of 0.75% (as compared to the 1% incorporated in the
issued table) for its mortality improvement assumption. The change in assumption resulted in increases of $361 million and $117
million in the pension and other postretirement benefits obligations, respectively and an increase in 2015 cost of $45 million and $20
million for pension and other postretirement benefits, respectively.
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