Retirement Benefits | Retirement Benefits PSE has a defined benefit pension plan (Qualified Pension Benefits) covering the largest portion of PSE employees. Pension benefits earned are a function of age, salary, years of service and, in the case of employees in the cash balance formula plan, the applicable annual interest crediting rates. Starting with January 1, 2014, all newly hired non-represented employees, United Association of Journeymen and Apprentices of the Plumbing and Pipe Fitting Industry employees, and International Brotherhood of Electrical Workers Local Union 77 hired on or after December 12, 2014 who elect to accumulate the Company contribution in the cash balance formula portion of the pension plan, will receive annual pay credits of 4% each year. They will also receive interest credits like other participants in the cash balance pension formula of the pension plan, which are at least 1% per quarter. When an employee with a vested cash balance formula benefit leaves PSE, he or she will have annuity and lump sum options for distribution. Those who select the lump sum option will receive their current cash balance amount. PSE also maintains a non-qualified Supplemental Executive Retirement Plan (SERP) for its key senior management employees. In addition to providing pension benefits, PSE provides legacy group health care and life insurance benefits (Other Benefits) for certain retired employees. These benefits are provided principally through an insurance company. The insurance premiums, paid primarily by retirees, are based on the benefits provided during the prior year. Puget Energy records purchase accounting adjustments associated with the re-measurement of the retirement plans. The following tables summarize the Company’s change in benefit obligation, change in plan assets and amounts recognized in the Statements of Financial Position for the years ended December 31, 2015 and 2014 : Puget Energy and Puget Sound Energy Qualified Pension Benefits SERP Pension Benefits Other Benefits (Dollars in Thousands) 2015 2014 2015 2014 2015 2014 Change in benefit obligation: Benefit obligation at beginning of period $ 690,194 $ 573,317 $ 55,855 $ 47,279 $ 15,688 $ 14,939 Service cost 21,287 17,437 1,108 1,042 112 112 Interest cost 28,088 28,039 2,281 2,310 621 684 Actuarial loss (gain) (55,665 ) 104,618 (4,430 ) 7,162 (1,416 ) 1,108 Benefits paid (39,963 ) (33,217 ) (3,535 ) (1,938 ) (1,354 ) (1,424 ) Medicare part D subsidy received — — — — 295 269 Administrative expense (853 ) — — — — — Benefit obligation at end of period $ 643,088 $ 690,194 $ 51,279 $ 55,855 $ 13,946 $ 15,688 Puget Energy and Qualified Pension Benefits SERP Pension Benefits Other Benefits (Dollars in Thousands) 2015 2014 2015 2014 2015 2014 Change in plan assets: Fair value of plan assets at beginning of period $ 626,173 $ 615,721 $ — $ — $ 8,360 $ 8,774 Actual return on plan assets (4,489 ) 25,669 — — (378 ) 522 Employer contribution 18,000 18,000 3,535 1,938 575 488 Benefits paid (39,963 ) (33,217 ) (3,535 ) (1,938 ) (1,354 ) (1,424 ) Administrative expense (856 ) — — — — — Fair value of plan assets at end of period $ 598,865 $ 626,173 $ — $ — $ 7,203 $ 8,360 Funded status at end of period $ (44,223 ) $ (64,021 ) $ (51,279 ) $ (55,855 ) $ (6,743 ) $ (7,328 ) Puget Energy and Puget Sound Energy Qualified Pension Benefits SERP Pension Benefits Other Benefits (Dollars in Thousands) 2015 2014 2015 2014 2015 2014 Amounts recognized in Statement of Financial Position consist of: Noncurrent assets $ — $ — $ — $ — $ — $ — Current liabilities — — (2,545 ) (4,386 ) (353 ) (355 ) Noncurrent liabilities (44,223 ) (64,021 ) (48,734 ) (51,469 ) (6,390 ) (6,973 ) Net assets (liabilities) $ (44,223 ) $ (64,021 ) $ (51,279 ) $ (55,855 ) $ (6,743 ) $ (7,328 ) Puget Energy and Puget Sound Energy Qualified Pension Benefits SERP Pension Benefits Other Benefits (Dollars in Thousands) 2015 2014 2015 2014 2015 2014 Pension Plans with an Accumulated Benefit Obligation in excess of Plan Assets: Projected benefit obligation $ 643,088 $ 690,194 $ 51,279 $ 55,855 $ 13,946 $ 15,688 Accumulated benefit obligation 635,599 681,745 46,978 50,137 13,828 15,553 Fair value of plan assets 598,865 626,173 — — 7,203 8,360 The following tables summarize Puget Energy's and PSE's pension benefit amounts recognized in AOCI for the years ended December 31, 2015 and 2014 : Puget Energy Qualified Pension Benefits SERP Pension Benefits Other Benefits (Dollars in Thousands) 2015 2014 2015 2014 2015 2014 Amounts recognized in Accumulated Other Comprehensive Income consist of: Net loss (gain) $ 45,447 $ 55,471 $ 9,848 $ 15,918 $ (1,834 ) $ (1,457 ) Prior service cost (credit) (11,802 ) (13,782 ) 288 331 — — Total $ 33,645 $ 41,689 $ 10,136 $ 16,249 $ (1,834 ) $ (1,457 ) Puget Sound Energy Qualified Pension Benefits SERP Pension Benefits Other Benefits (Dollars in Thousands) 2015 2014 2015 2014 2015 2014 Amounts recognized in Accumulated Other Comprehensive Income consist of: Net loss (gain) $ 221,064 $ 247,331 $ 13,202 $ 19,751 $ 3,834 $ (3,733 ) Prior service cost (credit) (9,379 ) (10,952 ) 295 339 — 3 Total $ 211,685 $ 236,379 $ 13,497 $ 20,090 $ 3,834 $ (3,730 ) The following tables summarize Puget Energy's and PSE's net periodic benefit cost for the years ended December 31, 2015 , 2014 and 2013 : Puget Energy Qualified Pension Benefits SERP Pension Benefits Other Benefits (Dollars in Thousands) 2015 2014 2013 2015 2014 2013 2015 2014 2013 Components of net periodic benefit cost: Service cost $ 21,287 $ 17,437 $ 19,285 $ 1,108 $ 1,042 $ 1,498 $ 112 $ 112 $ 134 Interest cost 28,088 28,039 24,754 2,281 2,310 2,045 621 684 664 Expected return on plan assets (45,038 ) (42,464 ) (39,095 ) — — — (531 ) (535 ) (436 ) Amortization of prior service cost (credit) (1,980 ) (1,980 ) (1,980 ) 42 42 (17 ) — — — Amortization of net loss (gain) 3,887 — 2,889 1,641 913 1,461 (130 ) (393 ) 69 Net periodic benefit cost $ 6,244 $ 1,032 $ 5,853 $ 5,072 $ 4,307 $ 4,987 $ 72 $ (132 ) $ 431 Puget Sound Energy Qualified Pension Benefits SERP Pension Benefits Other Benefits (Dollars in Thousands) 2015 2014 2013 2015 2014 2013 2015 2014 2013 Components of net periodic benefit cost: Service cost $ 21,287 $ 17,437 $ 19,285 $ 1,108 $ 1,042 $ 1,498 $ 112 $ 112 $ 134 Interest cost 28,088 28,039 24,753 2,281 2,310 2,045 621 684 664 Expected return on plan assets (45,462 ) (43,252 ) (40,685 ) — — — (531 ) (535 ) (436 ) Amortization of prior service cost (credit) (1,573 ) (1,573 ) (1,573 ) 44 44 (16 ) 3 3 30 Amortization of net loss(gain) 20,555 13,195 20,612 2,120 1,461 2,191 (406 ) (702 ) (284 ) Net periodic benefit cost $ 22,895 $ 13,846 $ 22,392 $ 5,553 $ 4,857 $ 5,718 $ (201 ) $ (438 ) $ 108 The following tables summarize Puget Energy's and PSE's benefit obligations recognized in OCI for the years ended December 31, 2015 and 2014 : Puget Energy Qualified Pension Benefits SERP Pension Benefits Other Benefits (Dollars in Thousands) 2015 2014 2015 2014 2015 2014 Other changes (pre-tax) in plan assets and benefit obligations recognized in other comprehensive income: Net loss (gain) $ (6,136 ) $ 121,413 $ (4,430 ) $ 7,162 $ (508 ) $ 1,121 Amortization of net loss (gain) (3,887 ) — (1,641 ) (913 ) 131 394 Amortization of prior service credit 1,980 1,980 (42 ) (42 ) — — Total change in other comprehensive income for year $ (8,043 ) $ 123,393 $ (6,113 ) $ 6,207 $ (377 ) $ 1,515 Puget Sound Energy Qualified Pension Benefit SERP Pension Benefits Other Benefits (Dollars in Thousands) 2015 2014 2015 2014 2015 2014 Other changes (pre-tax) in plan assets and benefit obligations recognized in other comprehensive income: Net loss (gain) $ (5,711 ) $ 122,202 $ (4,430 ) $ 7,162 $ (508 ) $ 1,121 Amortization of net (loss) gain (20,556 ) (13,195 ) (2,120 ) (1,461 ) 407 702 Amortization of prior service cost (credit) 1,573 1,573 (44 ) (44 ) (3 ) (3 ) Total change in other comprehensive income for year $ (24,694 ) $ 110,580 $ (6,594 ) $ 5,657 $ (104 ) $ 1,820 The estimated net (loss) gain and prior service cost (credit) for the pension plans that will be amortized from accumulated OCI into net periodic benefit cost in 2016 by PSE are $15.0 million and $1.6 million , respectively. The estimated net (loss) gain for the SERP that will be amortized from accumulated OCI into net periodic benefit cost in 2016 is $1.3 million . The estimated prior service cost (credit) for the SERP that will be amortized from accumulated OCI into net periodic benefit cost in 2016 is immaterial . The estimated net (loss) gain and prior service cost (credit) for the other postretirement plans that will be amortized from accumulated OCI into net periodic benefit cost in 2016 is immaterial. For Puget Energy, the overall amounts expected to be amortized from accumulated OCI into net period benefit cost in 2016 were immaterial. The aggregate expected contributions by the Company to fund the qualified pension plan, SERP and the other postretirement plans for the year ending December 31, 2016 are expected to be at least $18.0 million , $2.5 million and $0.5 million , respectively. Assumptions In accounting for pension and other benefit obligations and costs under the plans, the following weighted-average actuarial assumptions were used by the Company: Qualified Pension Benefits SERP Pension Benefits Other Benefits Benefit Obligation Assumptions 2015 2014 2013 2015 2014 2013 2015 2014 2013 Discount rate 4.65 % 4.25 % 5.10 % 4.65 % 4.25 % 5.10 % 4.65 % 4.25 % 5.10 % Rate of compensation increase 4.50 4.50 4.50 4.50 4.50 4.50 4.50 4.50 4.50 Medical trend rate — — — — — — 7.20 5.70 6.80 Benefit Cost Assumptions Discount rate 4.25 % 5.10 % 4.15 % 4.25 % 5.10 % 4.15 % 4.25 % 5.10 % 4.15 % Return on plan assets 7.75 7.75 7.75 — — — 7.00 7.00 6.90 Rate of compensation increase 4.50 4.50 4.50 4.50 4.50 4.50 4.50 4.50 4.50 Medical trend rate — — — — — — 7.20 6.70 8.20 The assumed medical inflation rate used to determine benefit obligations is 7.20% in 2016 grading down to 4.30% in 2017 . A 1.0% change in the assumed medical inflation rate would have the following effects: 2015 2014 (Dollars in Thousands) 1% Increase 1% Decrease 1% Increase 1% Decrease Effect on post-retirement benefit obligation $ 52 $ (42 ) $ 47 $ (47 ) Effect on service and interest cost components 2 (2 ) 2 (2 ) The Company has selected the expected return on plan assets based on a historical analysis of rates of return and the Company’s investment mix, market conditions, inflation and other factors. The expected rate of return is reviewed annually based on these factors. The Company’s accounting policy for calculating the market-related value of assets for the Company’s retirement plan is as follows. PSE market-related value of assets is based on a five-year smoothing of asset gains (losses) measured from the expected return on market-related assets. This is a calculated value that recognizes changes in fair value in a systematic and rational manner over five years. The same manner of calculating market-related value is used for all classes of assets, and is applied consistently from year to year. Puget Energy’s pension and other postretirement benefits income or costs depend on several factors and assumptions, including plan design, timing and amount of cash contributions to the plan, earnings on plan assets, discount rate, expected long-term rate of return, and mortality and health care costs trends. Changes in any of these factors or assumptions will affect the amount of income or expense that Puget Energy records in its financial statements in future years and its projected benefit obligation. Puget Energy has selected an expected return on plan assets based on a historical analysis of rates of return and Puget Energy’s investment mix, market conditions, inflation and other factors. As required by merger accounting rules, market-related value was reset to market value effective with the merger. The discount rates were determined by using market interest rate data and the weighted-average discount rate from Citigroup Pension Liability Index Curve. The Company also takes into account in determining the discount rate the expected changes in market interest rates and anticipated changes in the duration of the plan liabilities. Plan Benefits The expected total benefits to be paid during the next five years and the aggregate total to be paid for the five years thereafter are as follows: (Dollars in Thousands) 2016 2017 2018 2019 2020 2021-2025 Qualified Pension total benefits $ 41,300 $ 42,400 $ 43,100 $ 43,300 $ 45,000 $ 235,600 SERP Pension total benefits 2,545 1,922 5,210 5,564 4,455 19,875 Other Benefits total with Medicare Part D subsidy 1,031 1,091 1,064 1,038 1,003 5,568 Other Benefits total without Medicare Part D subsidy 1,369 1,358 1,339 1,319 1,292 5,934 Plan Assets Plan contributions and the actuarial present value of accumulated plan benefits are prepared based on certain assumptions pertaining to interest rates, inflation rates and employee demographics, all of which are subject to change. Due to uncertainties inherent in the estimations and assumptions process, changes in these estimates and assumptions in the near term may be material to the financial statements. The Company has a Retirement Plan Committee that establishes investment policies, objectives and strategies designed to balance expected return with a prudent level of risk. All changes to the investment policies are reviewed and approved by the Retirement Plan Committee prior to being implemented. The Retirement Plan Committee invests trust assets with investment managers who have historically achieved above-median long-term investment performance within the risk and asset allocation limits that have been established. Interim evaluations are routinely performed with the assistance of an outside investment consultant. To obtain the desired return needed to fund the pension benefit plans, the Retirement Plan Committee has established investment allocation percentages by asset classes as follows: Allocation Asset Class Minimum Target Maximum Domestic large cap equity 25 % 31 % 40 % Domestic small cap equity 0 9 15 Non-U.S. equity 10 25 30 Fixed income 15 25 30 Real estate 0 0 10 Absolute return 5 10 15 Cash 0 0 5 Plan Fair Value Measurements ASC 715, “Compensation – Retirement Benefits” (ASC 715) directs companies to provide additional disclosures about plan assets of a defined benefit pension or other postretirement plan. The objectives of the disclosures are to disclose the following: (1) how investment allocation decisions are made, including the factors that are pertinent to an understanding of investment policies and strategies; (2) major categories of plan assets; (3) inputs and valuation techniques used to measure the fair value of plan assets; (4) effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets for the period; and (5) significant concentrations of risk within plan assets. ASC 820 allows the reporting entity, as a practical expedient, to measure the fair value of investments that do not have readily determinable fair values on the basis of the net asset value per share of the investment if the net asset value of the investment is calculated in a matter consistent with ASC 946, “Financial Services – Investment Companies.” The standard requires disclosures about the nature and risk of the investments and whether the investments are probable of being sold at amounts different from the net asset value per share. The following table sets forth by level, within the fair value hierarchy, the qualified pension plan as of December 31, 2015 and 2014 : Recurring Fair Value Measures Recurring Fair Value Measures As of December 31, 2015 As of December 31, 2014 (Dollars in Thousands) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Assets: Equities: Non-US equity 1 $ 69,127 $ 76,071 $ — $ 145,198 $ 71,026 $ 74,131 $ — $ 145,157 Domestic large cap equity 2 119,512 65,287 — 184,799 134,765 68,336 — 203,101 Domestic small cap equity 3 53,985 — — 53,985 59,657 — — 59,657 Total equities 242,624 141,358 — 383,982 265,448 142,467 — 407,915 Fixed income securities 4 81,696 58,425 — 140,121 72,331 67,182 — 139,513 Absolute return 5 — — 64,925 64,925 — — 65,251 65,251 Cash and cash equivalents 6 340 17,041 — 17,381 12,650 — — 12,650 Subtotal $ 324,660 $ 216,824 $ 64,925 $ 606,409 $ 350,429 $ 209,649 $ 65,251 $ 625,329 Net (payable) receivable — — — (7,544 ) — — — 844 Accrued income — — — — — — — — Total assets $ 598,865 $ 626,173 _________________ 1 Non – US Equity investments are comprised of a mutual fund (at level 1); and a commingled fund (at level 2). The investment in the mutual fund is valued at the daily closing price as reported by the funds. The investment in the commingled fund is valued at the net asset value per share multiplied by the number of shares held as of December 31, 2015 . 2 Domestic large cap equity investments are comprised of common stock (at level 1), and a commingled fund (at level 2). Investments in common stock traded on a national securities exchange are valued at the last reported sales price on the last business day of the year. Securities traded in the over-the-counter market and listed securities for which no sale was reported on that date are valued at the last reported sale or bid price, as available or at values based upon bid quotations for identical or similar instruments. The investment in the commingled fund is valued at the net asset value per share multiplied by the number of shares held as of December 31, 2015 . 3 Domestic small cap equity investments are comprised of common stock and a mutual fund, please see 1 and 2 above for a description. 4 Fixed income securities consist of mutual funds and US treasury bonds (at level 1), and government securities and corporate bonds (at level 2). Please see 1 above for a description of mutual funds. Government securities and corporate bonds are valued using pricing models maximizing the use of observable inputs for similar securities. When quoted prices are not available for identical or similar bonds, the bond is valued under a discounted cash flow approach maximizing observable inputs. 5 As of December 31, 2015 absolute return investments consist of two partnerships. The partnerships are valued based on the net asset value provided by the Plan's investment custodians, and reported in the funds' financial statements which are audited annually by independent accountants. These investments are at Level 3 under ASC 820 because the significant valuation inputs are primarily internal to the partnerships with little third party involvement. 6 The investment consists of a money market fund (at level 1) and a collective trust fund (at level 2). The money market fund is valued at the net asset value per share of $1.00 per unit as of December 31, 2015 . The collective trust fund invests primarily in commercial paper, notes, repurchase agreements, and other evidences of indebtedness which are payable on demand or short-term in nature. Level 3 Roll-Forward The following table sets forth a reconciliation of changes in the fair value of the plan’s Level 3 assets: As of December 31, 2015 As of December 31, 2014 (Dollars in Thousands) Partnership Total Partnership Total Balance at beginning of year $ 65,251 $ 65,251 $ 62,278 $ 62,278 Additional investments — — — — Distributions — — — — Realized losses on distributions — — — — Unrealized gain (loss) instruments still held at the reporting date (326 ) (326 ) 2,973 2,973 Transferred in/out of level 3 1 — — — — Balance at end of year $ 64,925 $ 64,925 $ 65,251 $ 65,251 _________________ 1 The plan had no transfers between level 2 and level 1 during the years ended December 31, 2015 or 2014 . The following table sets forth by level, within the fair value hierarchy, the Other Benefits plan assets which consist of insurance benefits for retired employees, at fair value: Recurring Fair Value Measures Recurring Fair Value Measures As of December 31, 2015 As of December 31, 2014 (Dollars in Thousands) Level 1 Level 2 Total Level 1 Level 2 Total Assets: Mutual fund 1 $ 7,135 $ — $ 7,135 $ 8,301 $ — $ 8,301 Cash equivalents 2 — 68 68 59 — 59 Total assets $ 7,135 $ 68 $ 7,203 $ 8,360 $ — $ 8,360 _______________ 1 This is a publicly traded balanced mutual fund. The fund seeks regular income, conservation of principal, and an opportunity for long-term growth of principal and income. The fair value is determined by taking the number of shares owned by the plan, and multiplying by the market price as of December 31, 2015 . 2 The investment consists of a money market fund (at level 1) and a collective trust fund (at level 2). The money market fund is valued at the net asset value per share of $1.00 per unit as of December 31, 2015 . The collective trust fund invests primarily in commercial paper, notes, repurchase agreements, and other evidences of indebtedness which are payable on demand or short-term in nature. |