Edison Pension Trust
Pension Funding Model Pension Plan Equation The illustration above represents the financial functioning of a pension trust. Ultimately, all benefits and expenses must be provided for by current assets, future contributions and future investment returns. 2
Actives vs. Inactives Plan Maturity 3,500 3,000 2,500 2,000 1,500 2,588 2,660 2,562 2,372 2,374 2,288 2,067 2,112 2,200 2,082 1,157 1,212 1,229 1,274 1,323 2,512 2,470 1,414 3,084 3,030 2,753 2,647 2,584 2,599 2,686 2,248 1,672 1,606 1,483 1,530 1,000 910 900 853 926 965 1,098 1,270 1,054 993 1,014 500 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Beginning of Year VTs + R&Bs Actives VTs Rets & Benes 3
Historical Cash Flow Plan Maturity 40,000,000 30,000,000 20,000,000 10,000,000 0-10,000,000-20,000,000-30,000,000 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Employer Contributions Benefits & Expenses Paid Net Cash Flow 4
Plan Experience Historical Investment Return 40% 30% 20% 10% 0% ($41 million loss) -10% -20% -30% ($172 million loss) 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Market Actuarial Assumed 5
What are the rules? Pension Protection Act of 2006 Measurement 1: Are annual contributions enough? Credit Balance = (AC RC ) x (Int. accumulated over time) AC = Annual contributions put in the Plan RC = Required contribution under Law Int. = Interest Credit Balance must remain above zero Credit Balance was $68 million at 12/31/14 Measurement 2: Are there enough assets on hand? PPA Funded Percentage = Actuarial Value of Assets Present Value of Accrued Benefits Actuarial Value of Assets* January 1, 2015 $618 million Present Value of Accrued Benefits** $708 million PPA Funded Percentage 87% * Returns different than 7.5% reflected over time. Note that at the time of the 2015 PPA Certification, the preliminary actuarial value of assets was $567 million. ** Based on long-term investment assumption of 7.5%. 6
What are the rules? Pension Protection Act of 2006 Endangered Status = Yellow Zone Less than 80% Funded, or Projected Credit Balance exhausted within 7 years Seriously Endangered Status = Orange Zone Less than 80% Funded, and Projected Credit Balance exhausted within 7 years, and Critical Status = Red Zone Less than 65% Funded and projected Credit Balance exhausted within 5 years, or Projected Credit Balance exhausted within 4 years, Critical and Declining Status = Deep Red Zone Projected to be insolvent in 15 years (20 years in some cases) Not Endangered or Critical = Green Zone 7
$ Millions Application of the rules Stable PPA Funding Position 80.0 110% 70.0 60.0 50.0 40.0 30.0 20.0 106% 25 93% 93% 28 26 97% 31 89% 39 90% 44 88% 55 68 87% 100% 90% 80% 70% 10.0 60% 0.0 2008 2009 2010 2011 2012 2013 2014 2015 50% Credit Balance PPA Funded Percentage 8
Application of the rules Funded Status Projections 120% $1,100 $900 108% 106% 89% 86% 86% 92% 98% $844 103% $906 100% $700 $500 $582 74% $475 82% $597 $667 $769 80% 60% $300 40% $100 151 116 87 50 1 20% -$100 (53) 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 (46) 0% Unfunded Vested Benefit $MVA Market Value of Assets % MVA% AVA% 9 9
Trustee Objectives 2011 Structure Retention of experienced work force Providing better than 1.0% accrual rate on contributions Later retirement for longer-lived next generation Greater chance of maintaining Green Zone Longer employment period, shorter retirement period Asset portfolio covering new structure created with less risk 10
Plan Structures Benefit Percentage Factors (BPF) 1970 Plan Structure 2011 Plan Structure BPF Applied for the Year Years of Credited Service at End of Year BPF Applied for the Year 2.00% to 4.50% prior to 2009 Up to 5.000 1.000% 1.00% for 2009 and beyond 5.001 10.000 1.066% 10.001 15.000 1.132% 15.001 20.000 1.198% 20.001 25.000 1.264% More than 25.000 1.330% 11
Plan Structures Comparisons 1970 Plan Structure 2011 Plan Structure Active Participants @ 1/1/14 2,379 705 Estimated Benefit at 65 Future Contribution Rate Level $2,765 - $4,055 $3,684 1% per year increase $3,094 - $4,055 $4,666 Total Contributions Made $134,000 - $282,227 $316,200 - $366,663 * Based on 1985, 1995, 2005, and 2015 dates of hire, 1,700 hours worked per year, $6.20 hourly contribution rate beginning in 2015, 30 years of service at retirement. 12
What will MEPRA do? Multiemployer Pension Reform Act of 2014 (MEPRA) 1. Extends the Pension Protection Act (PPA) 2. Increases the Pension Benefit Guaranty Corporation premiums for multiemployer plans 3. Makes technical changes to original PPA 4. Allows retiree benefits to be reduced only in limited and specifically defined circumstances 13
What will MEPRA NOT do currrently? Multiemployer Pension Reform Act of 2014 (MEPRA) DOES NOT reduce retirement benefits of retirees or actives under the Edison Pension Trust DOES NOT affect Edison s asset or liability base DOES NOT affect how Edison s assets are invested DOES NOT affect the operation of the Plan 14
Benefit Changes Recent 2009 Benefit Percentage Factor (BPF) increased from 1.0% to 1.1% $600,000 cost Pension Relief Act of 2010 New money must pay for improvement, not by existing assets Expires December 31, 2016 Benefit Improvement Examples Increase contribution rate 25 per hour increase is a $5 / mth. increase in earned benefit for 2,000 hours of work; Fights impact of inflation 15 Increase BPF for one year 10% - 25 / hr. ; 20% - 50 / hr.; 100% - $2.50 / hr. Contribution increase at beginning of calendar year Headwinds Participants are expected to live longer Pressure on achieving 7.50% net investment return
Reliance And Caveats In preparing this report, we relied, without audit, on the participant data supplied by the administrative agent and the financial statements supplied by the Plan s auditor. We found this information to be reasonably consistent and comparable with the information used for other purposes. The results shown depend on the integrity of this information. If any of this information is inaccurate or incomplete our results may be different and our calculations may need to be revised. For actuarial requirements under ERISA, all costs, liabilities, rates of interest, and other factors under the Plan (except when mandated directly by the Internal Revenue Code and its regulations) have been determined on the basis of actuarial assumptions and methods which are individually reasonable (taking into account the experience of the Plan and reasonable expectations) and which, in combination, offer our best estimate of anticipated experience under the Plan. We completed this actuarial valuation in accordance with our understanding of IRS minimum funding requirements as amended by subsequent legislation, including the Pension Protection Act of 2006 (PPA) and Pension Relief Act of 2010, and reflecting all proposed regulations and guidance issued to date. Future actuarial measurements may differ significantly from the current measurements presented in this report due to many factors, including: plan experience differing from that anticipated by the economic or demographic assumptions; changes in economic or demographic assumptions; increases or decreases expected as part of the natural operation of the methodology used for these measurements (such as the end of an amortization period or additional cost or contribution requirements based on the plan s funded status); and changes in plan provisions or applicable law. Due to the limited scope of our assignment, we did not perform an analysis of the potential range of future measurements. Actuarial computations under ERISA are to determine the minimum required and maximum allowable funding amounts for an ongoing plan. The calculations in the enclosed report have been made on a basis consistent with our understanding of ERISA. For actuarial requirements under FASB ASC Topic 960, all liabilities, rates of interest, and other factors under the Plan have been determined on the basis of actuarial assumptions and methods which are reasonable and consistent with our understanding of FASB ASC Topic 960. Results for other purposes may be significantly different than the results in this report; other calculations may be needed for other purposes, such as judging benefit security at plan termination. The consultants who worked on this assignment are pension actuaries. Milliman s advice is not intended to be a substitute for qualified legal or accounting counsel. 16
Third Party Distribution Milliman s work is prepared solely for the internal business use of the Trust and its Trustees (for their use in administering the Plan). Milliman's work may not be provided to third parties without Milliman's prior written consent. Milliman does not intend to benefit or create a legal duty to any third party recipient of its work product. Milliman s consent to release its work product to any third party may be conditioned on the third party signing a Release, subject to the following exceptions: a) The Trust may provide a copy of Milliman s work, in its entirety, to the Trust s professional service advisors who are subject to a duty of confidentiality and who agree to not use Milliman s work for any purpose other than to benefit the Trust. b) The Trust may distribute certain work product that Milliman and the Trustees mutually agree is appropriate for distribution to participating employers, pension participants and other parties as may be required by the Pension Protection Act of 2006. No third party recipient of Milliman's work product should rely upon Milliman's work product. Such recipients should engage qualified professionals for advice appropriate to their own specific needs. 17