Eversource 2012 Annual Report Download - page 63

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Compensation/Progression Rate: This assumption reflects the expected long-term salary growth rate, which impacts the estimated
benefits that pension plan participants receive in the future. We used a compensation/progression rate of 3.5 percent as of
December 31, 2012 and 2011 for the NUSCO Pension Plan and 4 percent for the NSTAR Pension Plan as of December 31, 2012,
which reflects our current expectation of future salary increases, including consideration of the levels of increases built into collective
bargaining agreements.
Actuarial Determination of Expense: Pension and PBOP expense is determined by our actuaries and consists of service cost and prior
service cost, interest cost based on the discounting of the obligations, amortization of actuarial gains and losses and amortization of the
net transition obligation, offset by the expected return on plan assets. Actuarial gains and losses represent differences between
assumptions and actual information or updated assumptions.
We determine the expected return on plan assets for the NUSCO Pension and PBOP Plans by applying our assumed rate of return to a
four-year rolling average of plan asset fair values, which reduces year-to-year volatility. This calculation recognizes investment gains or
losses over a four-year period from the years in which they occur. Investment gains or losses for this purpose are the difference
between the calculated expected return and the actual return or loss based on the change in the fair value of assets during the year.
As of December 31, 2012, investment gains and losses that remain to be reflected in the calculation of plan assets over the next four
years were losses of $224.4 million and gains of $0.7 million for the NUSCO Pension Plan and PBOP Plans, respectively. As
investment gains and losses are reflected in the average plan asset fair values, they are subject to amortization with other
unrecognized actuarial gains or losses. The plans currently amortize unrecognized actuarial gains or losses as a component of
pension and PBOP expense over the average future employee service period. As of December 31, 2012, the net unrecognized
actuarial losses on the NUSCO Pension and PBOP Plan liabilities were $1.1 billion and $176.5 million, respectively. For the NSTAR
Pension and PBOP Plans, the entire difference between the actual and expected return on plan assets as of December 31, 2012 is
immediately reflected as a component of unrecognized actuarial gains or losses to be amortized over the estimated average future
service period of the employees. As of December 31, 2012, the net unrecognized actuarial losses on the NSTAR Pension and PBOP
Plan liabilities were approximately $724 million and $176 million, respectively.
Forecasted Expenses and Expected Contributions: Based upon the assumptions and methodologies discussed above, we estimate
that the combined expense for the Pension and PBOP Plans will be $241 million and $46 million, respectively, in 2013. Pension and
PBOP expense for subsequent years will depend on future investment performance, changes in future discount rates and other
assumptions, and various other factors related to the populations participating in the plans. Pension and PBOP expense charged to
earnings is net of the amounts capitalized.
We expect to continue our policy to contribute to the NUSCO PBOP Plans at the amount of PBOP expense excluding any curtailments
and the NSTAR PBOP Plan at an amount that approximates benefit payments. NU's policy is to fund the Pension Plans annually in an
amount at least equal to an amount that will satisfy the federal requirements. NU made contributions to the NUSCO Pension Plan
totaling $197.4 million in 2012, of which $87.7 million was contributed by PSNH. NSTAR Electric contributed $25 million to the NSTAR
Pension Plan in 2012. Our Pension Plan funded ratio (the value of plan assets divided by the funding target in accordance with the
requirements and guidelines of the PPA) was 94.8 percent and 100.2 percent as of January 1, 2012 for the NUSCO Pension Plan and
NSTAR Pension Plan, respectively. We currently estimate that aggregate contributions of $285 million to the Pension Plans will be
made in 2013. Fluctuations in the average discount rate used to calculate expected contributions to the Pension Plans can have a
significant impact on the amounts.
Sensitivity Analysis: The following represents the hypothetical increase to the Pension Plans’ (excluding SERP) and PBOP Plans’
reported annual cost as a result of a change in the following assumptions by 50 basis points:
Pension Plan Cost
PBOP Plan Cost
(Millions of Dollars)
As of December 31,
Assumption Change
2012
2011
2012
2011
NU Consolidated
Lower long-term rate of return
$
15.0
$
10.3
$
3.1
$
1.3
Lower discount rate
$
22.0
$
14.2
$
6.7
$
2.3
Higher compensation increase
$
10.4
$
6.5
N/A
N/A
NSTAR Plans
Lower long-term rate of return
$
4.8
N/A
$
1.7
N/A
Lower discount rate
$
6.8
N/A
$
4.1
N/A
Higher compensation increase
$
3.6
N/A
N/A
N/A
Changes in pension and PBOP costs would not impact net income for the NSTAR Plans as their expenses are fully recovered in rates,
which reconcile each year relative to the change in costs.
Health Care Cost: For the NUSCO PBOP Plans, the health care cost trend rate assumption is 7 percent, subsequently decreasing by
50 basis points per year to an ultimate rate of 5 percent in 2017. For the NSTAR PBOP Plan, the health care cost trend rate is 7.10
percent, subsequently decreasing to an ultimate rate of 4.50 percent in 2024. The effect of a hypothetical increase in the health care
cost trend rate by one percentage point would be to have increased service and interest cost components of PBOP Plan expense by
$8.9 million in 2012, with a $126.5 million impact on the postretirement benefit obligation.
See Note 10A, "Employee Benefits - Pension Benefits and Postretirement Benefits Other Than Pensions," to the consolidated financial
statements for more information.