Retirement and Investment Webinar Series - Risk - …€¦ · · 2015-03-31Retirement and...

Aon HewittRetirement and Investment

Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon company.Nothing in this document should be construed as legal or investment advice. Please consult with your independent professional for any such advice. To protect the confidential and proprietary information included in this material, it may not be disclosed or provided to any third parties without the approval of Aon Hewitt.

Retirement and Investment Webinar SeriesMarch 31, 2015

Aon HewittRetirement and Investment

Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon company.Nothing in this document should be construed as legal or investment advice. Please consult with your independent professional for any such advice. To protect the confidential and proprietary information included in this material, it may not be disclosed or provided to any third parties without the approval of Aon Hewitt.

Utility Pension Sector Update Joe McDonald, Aon Hewitt Susan Greenberg, Iberdrola USA

Aon Hewitt | Retirement and InvestmentProprietary & Confidential | 2015Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon company. 3

Agenda Slide

Section 1 Financial Benchmarking Data for Utility IndustrySection 2 Settlement Activity in Utility IndustrySection 3 Case Study: Iberdrola Lump Sum Program


Agenda Slide



Utility Industry Funded Status

Pension Plans remain meaningfully underfunded, dropping to 84% funded at YE 2014

92%98%

104%

73%79% 82% 80% 79%

91%84%

60%

70%

80%

90%

100%

110%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Utilities

S&P 500

Aggregated Pension Funded Status, by Year

Source: Company Financial Statements, Capital IQ


Year-End Fiscal 2014 Pension Funded Ratio by Company

0%

20%

40%

60%

80%

100%

120%

140%

160%

FEET

RS

RE

CM

S ES DTE

NR

G ED EIX

AE

SC

NP

Ibed

EX

CX

EL

GA

S NI

PO

MP

NW

PC

GA

EE

PP

LTE

G SO TEN

Grid

PE

GS

CG

AE

PW

EC D

DU

KN

EE

Variation in funded levels, majority below 100%Year-end Fiscal 2014 Pension Plan Funded Ratio (Qualified + Nonqualified)



2014 Change in Funded Ratio

-20%

-15%

-10%

-5%

0%

5%

CM

SN

EE

Ibed

PE

GS

CG

GA

SED FE D ES ET

RP

OM

SO DTE

SR

EN

RG

WE

CE

IXE

XC

TEG

XE

LN

IP

CG

CN

PD

UK

AE

EP

PL

AE

PA

ES

PN

WTE N

Grid

Significant Decline seen in funded levels, majority below 100%

Source: 2013 and 2014 Company Financial Statements, Capital IQ

Average: 7% decline


2014 Change in Funded Position by Source—Utility Industry

YE2013 Service Cost Interest Cost Asset Return Contributions Liability Loss Other YE2014

14.9deficit

+3.2

+7.8

-13.0

+22.0

29.7deficit

+0.5

-4.7

Deficit Grew by $15B, primarily due to discount rate declines and mortality table updates(amounts in $billions)



Change in Actual Asset Allocation—Utility Industry

Gradual Increase in Fixed Income and Alternatives, sourced from Equities


Pension Asset Allocation (Equal Weight to Each Company)

Peer Set = Custom Avg

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014Custom Avg

Fixed Income 32% 31% 32% 40% 36% 37% 41% 40% 39% 41%Equity 64% 64% 62% 52% 51% 51% 47% 46% 45% 46%Real Estate 2% 3% 3% 3% 2% 2% 2% 2% 2% 2%Other 2% 3% 3% 6% 11% 11% 10% 13% 14% 11%

0%

10%

20%

30%

40%

50%

60%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Custom AvgFixed IncomeEquityReal EstateOther


Three Dimensions of Pension Risk - 2014

This chart plots three dimensions of pension risk for some large regulated utilities in the US Funded status (Market

Value of Assets / PBO) onvertical axis

Expected accounting charge per dollar settled, approximated as Pension AOCI / PBO on horizontal axis

Materiality of pension financials to company (PBO divided by Market Cap) –bubble size

Pension data is as of fiscal year-end 2014, reflecting US plans only. Market cap is as of 12/31/2014In this version, pension regulatory assets are not reflected. In reality, most past losses are expected to be recovered via rates.



Three Dimensions of Pension Risk - 2014

In this chart, we use the same data as in the prior chart, but we offset the unrecognized pension loss with the corresponding regulatory asset, as disclosed in 2014 10-K filings

In cases where these amounts were not clearly disclosed, we estimated them based on the data given.

While costs for past losses are mostly expected to be recovered, this is not true for all utilities. Furthermore, one-time settlements may result in only partial recovery of costs for past losses.



Agenda Slide



Liability OperatingFees

PBGCPremiums

MortalityAdjustments

OtherAssumptions

EconomicLiability

Lump SumSettlement Cost

Expenses

Assumptions

Settlement Economics


Settlement Activity—Utility Industry

Company Summary of Actions

AEP 2012 Lump Sum Window for TVs

EFH 2012 Plan Termination

Exelon 2012 Lump Sum Window for TVs

NV Power 2012 and 2013 Lump Sum Window for TVs

PG&E 2013 Lump Sum Window for TVs

Black Hills 2013 Lump Sum Window for TVs

PPL 2013 and 2014 Lump Sum Window for TVs

Iberdrola 2013 (TVs) and 2014 (Retirees) Lump Sum Window

FirstEnergy 2014 Lump Sum Window for TVs

Summary of Publicly Disclosed Settlement Activity in Utility Industry

Source: Company Financial Statements


Liability Settlements—Utility Considerations

Moderate level of lump sum activity observed in utility industry

Supporting Factors Mitigating Factors

PBGC premium increases

Reduced administrative burden

Mortality table updates

Risk reduction

Materiality of Pension liabilities

Change in perceived requirement for PLR

Settlement accounting and impact onregulatory accounting

Employee and retiree relations

Materiality of TV pension liability

(Relative) lack of de-risking of investment portfolio

Expense impact


2014 Aggregate Pension Expense—Utility Industry

Service Cost Interest Cost Expected Returnon Assets

Amort of Loss Amort of PSC Other Total Expense

+3.2

+7.8 -10.3

+4.2 +0.1Total:$4.9-0.1

Industry Pension Expense of $4.9B, $4.2 attributable to loss amortizations(amounts in $billions)



Agenda Slide



About Iberdrola

Iberdrola SA is a Spanish multinational energy group with a market cap of about $44 billion Global workforce of 28,000 employees with main operations in Spain, the U.K., U.S., Mexico

and Brazil Iberdrola USA Networks is largest U.S. subsidiary

– About 4,100 employees• Three regulated utilities: New York State Electric & Gas, Rochester Gas & Electric, and

Central Maine Power – 60% of employees are covered by collective bargaining agreements


Iberdrola USA Networks Pension Plans

Five qualified defined benefit plans covering about 12,000 participants; 4,000 actives and 8,000 inactives

Four plans cover employees in regulated businesses At 12/31/2014, funded status was as follows:

Of the 5 qualified plans, all are closed to new hires; in one plan, benefits are frozen, and in the other 4 plans, benefits are frozen for a subset of the employees

In $Billions

Projected Benefit Obligation 2.6

Assets 2.1

Funded Status 0.5


De-risking Activities to Date

Annuities purchased many years ago– Some are fully guaranteed and some are not– The fully guaranteed annuities are excluded from the DB plans’ assets and liabilities; the non-

guaranteed annuities are included Transitioning to defined contribution-only programs

– New hires and non-union employees covered under cash balance formula in DB plans– Longer-service employees continue to accrue DB benefits under traditional formulas; DC-only

program was considered, but was too much of a cut-back and could have led to mass retirements and loss of institutional knowledge

Asset allocation as of 12/31/2014: 60% equities/40% fixed income– Have recently considering de-risking assets:

• In New York, discussed de-risking with New York Public Service Commission in 2013 but they didn’t appear to be receptive to it

• In Maine, company will be moving forward with gradual de-risking In 2013, ran lump sum window for vested terms in all 5 plans

– 52% take rate– About $65 million of projected benefit obligation was settled


Retiree Lump Sum Window in 2014

Overall objective: reduce pension liabilities for retired participants up to each plan’s U.S. GAAP settlement accounting threshold

If 2014 non-window and window lump sums exceeded the settlement accounting threshold, Iberdrola would have recognized significant losses that would not have been recoverable in rates charged to customers

In October 2013, applied to IRS for Private Letter Ruling (PLR) but did not get one– IRS responded in April 2014 that they were no longer issuing PLRs for retiree lump sum windows– IRS suggested Iberdrola use the determination letter process for approval

Plan amendments were very complicated given competing desires to maximize the take rate, avoid settlement accounting, and be nondiscriminatory


Retiree Lump Sum Window Process

Date Activity

Sept 2013 Adoption of plan amendments

Oct 2013 Application to IRS for private letter ruling (PLR)

April 2014 Data solicitation to retirees; no mention of lump sum window

April 2014 IRS response that no longer issuing PLRs for lump sum windows

May 2014 Decision to move ahead without PLR

May–Aug 2014 Data work; multiple letters; election packages; administration set-up

Aug 2014 Announcement letters sent to retirees

Sept 2014 Election packages sent out that included detailed explanation of offer

Sept–Nov 2014 Window open for 60 days

Late Nov 2014 Determination of which retirees can receive lump sums

Dec 2014 Lump sums paid out; annuity forms changed


Retiree Lump Sum Window Results

In September 2014, about 4,000 retirees with a $1.1 billion liability were offered the lump sum– Excluded retirees whose benefits were partially covered by non-guaranteed insurance company

annuities Settlement accounting threshold was $137 million

– Non-window lump sums during 2014 totaled $18 million– Lump sums for the window limited to $119 million

Election results– 930 (23%) elected lump sums, but limited to 760 (19%) to avoid settlement accounting– Settled $119 million in liability


Lessons Learned from Running Window

Data issues can be significant—10% of the group takes 90% of the time Consider excluding certain populations—for example, QDROs and beneficiaries Communications—challenge to communicate complex offer in an understandable way, especially

given the need to explain to retirees that some may not get the lump sum that they had elected Annuity options—consider limiting; for example, 50% and 75% J&S if married and life annuity if single Contingent annuity election—provided to those closed out from receiving lump sum that they had

elected Trustee interactions—get trustee(s) involved early; we had multiple trustees with unique issues Work effort—full-time for a significant number of staff, internal and external Overall assessment—very pleased with the result


Questions and Answers


Biographies

Joe McDonald, Senior Partner, Aon HewittJoe is a Senior Partner in Aon Hewitt’s Retirement Consulting practice, is the Retirement Practice Leader for the NJ market, and leads Aon Hewitt’s Pension Risk Management group for North America. In this role he leads Aon Hewitt’s efforts in the emerging area of risk management, liability settlement and asset-liability management as it applies to retirement programs. In this capacity he works with clients on developing and implementing strategies related to the design, financing and investments of their retirement programs.Joe has a number of years of experience working with electric and gas utilities on all aspects of retirement plan management. This experience has included comprehensive plan design review, asset-liability strategy development and risk management, expert witness testimony in rate case proceedings (written and verbal), and support of union negotiations.Joe is a Fellow of the Society of Actuaries, a CFA charter holder, and an Enrolled Actuary. He has been with Aon Hewitt since 1998.

Susan Greenberg, Director-Rewards, Iberdrola USASusan is the Director-Rewards for Iberdrola USA Networks. She is responsible for all compensation and benefits, broad-based and executive. Susan participates in and supports strategy formulation, union negotiations, regulatory proceedings, compliance activities, communications and many other activities in these areas. Susan is also an Associate of the Society of Actuaries, and prior to joining Iberdrola USA Networks, she was a Principal of Towers Perrin, specializing in retirement benefits


Legal Disclosures and Disclaimers

Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc. (“AHIC”). The information contained herein is given as of the date hereof and does not purport to give information as of any other date. The delivery at any time shall not, under any circumstances, create any implication that there has been a change in the information set forth herein since the date hereof or any obligation to update or provide amendments hereto.

This document is not intended to provide, and shall not be relied upon for, accounting, legal or tax advice or investment recommendations. Any accounting, legal, or taxation position described in this presentation is a general statement and shall only be used as a guide. It does not constitute accounting, legal, and tax advice and is based on AHIC’s understanding of current laws and interpretation.

This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. The comments in this summary are based upon AHIC’s preliminary analysis of publicly available information. The content of this document is made available on an “as is” basis, without warranty of any kind. AHIC disclaims any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. AHIC. reserves all rights to the content of this document. No part of this document may be reproduced, stored, or transmitted by any means without the express written consent of AHIC.

© Aon plc 2015. All rights reserved.


About Aon Hewitt

Aon Hewitt empowers organizations and individuals to secure a better future through innovative talent, retirement and health solutions. We advise, design and execute a wide range of solutions that enable clients to cultivate talent to drive organizational and personal performance and growth, navigate retirement risk while providing new levels of financial security, and redefine health solutions for greater choice, affordability and wellness. Aon Hewitt is the global leader in human resource solutions, with over 30,000 professionals in 90 countries serving more than 20,000 clients worldwide. For more information, please visit aonhewitt.com.

Retirement and Investment Webinar Series - Risk - …€¦ · · 2015-03-31Retirement and...

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