Eversource 2015 Annual Report Download - page 53

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Expected Long-Term Rate of Return on Plan Assets: In developing this assumption, we consider historical and expected returns as well as input
from our consultants. Our expected long-term rate of return on assets is based on assumptions regarding target asset allocations and corresponding
expected rates of return for each asset class. We routinely review the actual asset allocations and periodically rebalance the investments to the
targeted asset allocations when appropriate. For the year ended December 31, 2015, our aggregate expected long-term rate of return assumption of
8.25 percent was used to determine our pension and PBOP expense. For the forecasted 2016 pension and PBOP expense, our expected long-term
rate of return of 8.25 percent for all plans was used reflecting our target asset allocations.
Discount Rate: Payment obligations related to the Pension and PBOP Plans are discounted at interest rates applicable to the expected timing of each
plan’s cash flows. The discount rate that was utilized in determining the 2015 pension and PBOP obligations was based on a yield-curve approach.
This approach utilizes a population of bonds with an average rating of AA based on bond ratings by Moody’s, S&P and Fitch, and uses bonds with
above median yields within that population. As of December 31, 2015, the discount rates used to determine the funded status were 4.6 percent for
the Pension Plan and 4.62 percent for the PBOP Plan. As of December 31, 2014, the discount rates used were 4.2 percent for the Pension Plans and
4.22 percent for the PBOP Plans. The increase in the discount rate used to calculate the funded status resulted in a decrease on the Pension and
PBOP Plan’s liability of approximately $267 million and $60 million, respectively, as of December 31, 2015.
Compensation/Progression Rate: This assumption reflects the expected long-term salary growth rate, including consideration of the levels of
increases built into collective bargaining agreements, and impacts the estimated benefits that Pension Plan participants receive in the future. As of
both December 31, 2015 and 2014, the compensation/progression rate used to determine the funded status was 3.5 percent.
Mortality Assumptions: Assumptions as to mortality of the participants in our Pension and PBOP Plans are a key estimate in measuring the expected
payments a participant may receive over their lifetime and the corresponding plan liability we need to record. During 2014, the Society of Actuaries
released a series of updated mortality tables resulting from studies that measured mortality rates for various groups of individuals. The updated
mortality tables released in 2014 increased the life expectancy of plan participants by three to five years and had the effect of increasing the estimated
benefits to be provided to plan participants. The impact of adopting the updated mortality tables on Eversource’s liability as of December 31, 2014
was an increase of approximately $340 million and $82 million for the Pension and PBOP Plans, respectively. In 2015, a revised scale for the
mortality table was released having the effect of decreasing the estimate of benefits to be provided to plan participants. The impact of the adoption of
the new mortality scale resulted in a decrease of $48 million and $23 million for the Pension and PBOP Plans’ liability, respectively, as of
December 31, 2015.
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, and amortization of actuarial gains and losses, offset by the expected return on plan assets.
Actuarial gains and losses represent differences between assumptions and actual information or updated assumptions.
The expected return on plan assets is determined by applying the assumed long-term rate of return to the Pension and PBOP Plan asset balances.
This calculated expected return is compared to the actual return or loss on plan assets at the end of each year to determine the investment gains or
losses to be immediately reflected in unrecognized actuarial gains and losses.
Forecasted Expenses and Expected Contributions: We estimate that the expense for the Pension Plan (excluding the SERP Plans) will be
approximately $65 million and income for the PBOP Plan will be approximately $7.7 million, respectively, in 2016. Effective January 1, 2016, we
elected to transition the discount rate to the spot rate methodology from the yield-curve approach for the service and interest cost components of
Pension and PBOP expense because it provides a more precise measurement by matching projected cash flows to the corresponding spot rates on the
yield curve. Historically, these components were estimated using the same weighted-average discount rate as for the funded status. The discount
rates used to estimate the 2016 service costs are 4.91 percent and 5.14 percent for the Pension and PBOP Plans, respectively. The discount rates used
to estimate the 2016 interest costs are 3.80 percent and 3.72 percent for the Pension and PBOP Plans, respectively. 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.
Our policy is to annually fund the Pension Plan in an amount at least equal to the amount that will satisfy all federal funding requirements. We
contributed $154.6 million to the Pension Plan in 2015. We currently estimate approximately $146 million of contributions to the Pension Plan in
2016.
For the PBOP Plan, it is our policy to annually fund the PBOP Plan though tax deductible contributions to external trusts. We contributed $7.9
million to the PBOP Plan in 2015. We currently estimate approximately $9.5 million in contributions to the PBOP Plan in 2016.
Sensitivity Analysis: The following represents the hypothetical increase to the Pension Plan’s (excluding the SERP Plans) and PBOP Plan’s reported
annual cost as a result of a change in the following assumptions by 50 basis points:
(Millions of Dollars) Increase in Pension Plan Cost Increase in PBOP Plan Cost
Assumption Change As of December 31,
Eversource 2015 2014 2015 2014
Lower expected long-term rate of return $ 20.6 $ 19.3 $ 4.2 $ 4.0
Lower discount rate $ 26.3 $ 19.1 $ 6.2 $ 2.2
Higher compensation rate $ 12.4 $ 10.2 N/A N/A