Retirement benefits

12 Months Ended

Dec. 31, 2011

Retirement benefits

Retirement benefits

9 · Retirement benefits

Defined benefit plans. Substantially all of the employees of HEI and the electric utilities participate in the Retirement Plan for Employees of Hawaiian Electric Industries, Inc. and Participating Subsidiaries (HEI/HECO Pension Plan). Substantially all of the employees of ASB and its subsidiaries participated in the American Savings Bank Retirement Plan (ASB Pension Plan) until it was frozen on December 31, 2007. The HEI/HECO Pension Plan and the ASB Pension Plan (collectively, the Plans) are qualified, noncontributory defined benefit pension plans and include benefits for union employees determined in accordance with the terms of the collective bargaining agreements between the utilities and their respective unions. The Plans are subject to the provisions of ERISA. In addition, some current and former executives and directors of HEI and its subsidiaries participate in noncontributory, nonqualified plans (collectively, Supplemental Plans). In general, benefits are based on the employees’ or directors’ years of service and compensation.

The continuation of the Plans and the Supplemental Plans and the payment of any contribution thereunder are not assumed as contractual obligations by the participating employers. The Supplemental Plan for directors has been frozen since 1996. The ASB Pension Plan was frozen as of December 31, 2007. The HEI Supplemental Executive Retirement Plan and ASB Supplemental Executive Retirement, Disability, and Death Benefit Plan (noncontributory, nonqualified, defined benefit plans) were frozen as of December 31, 2008. No participants have accrued any benefits under these plans after the respective plan’s freeze and the plans will be terminated at the time all remaining benefits have been paid.

Each participating employer reserves the right to terminate its participation in the applicable plans at any time, and HEI and ASB reserve the right to terminate their respective plans at any time. If a participating employer terminates its participation in the Plans, the interest of each affected participant would become 100% vested to the extent funded. Upon the termination of the Plans, assets would be distributed to affected participants in accordance with the applicable allocation provisions of ERISA and any excess assets that exist would be paid to the participating employers. Participants’ benefits in the Plans are covered up to certain limits under insurance provided by the Pension Benefit Guaranty Corporation.

To determine pension costs for HEI and its subsidiaries under the Plans and the Supplemental Plans, it is necessary to make complex calculations and estimates based on numerous assumptions, including the assumptions identified below.

Postretirement benefits other than pensions.  HEI and the electric utilities provide eligible employees health and life insurance benefits upon retirement under the Postretirement Welfare Benefits Plan for Employees of Hawaiian Electric Company, Inc. and participating employers (HECO Benefits Plan). Eligibility of employees and dependents are based on eligibility to retire at termination, the retirement date and the date of hire. The plan was amended in 2011, changing eligibility for certain bargaining unit employees hired prior to May 1, 2011, based on new minimum age and service requirements effective January 1, 2012, per the collective bargaining agreement, and certain management employees hired prior to May 1, 2011 based on new eligibility minimum age and service requirements effective January 1, 2012. The minimum age and service requirements for management and bargaining unit employees hired May 1, 2011 and thereafter have increased and their dependents are not eligible to receive postretirement benefits. Employees may be eligible to receive benefits from the HEI/HECO Pension Plan but may not be eligible for postretirement welfare benefits if the different eligibility requirements are not met.

The executive death benefit plan was frozen on September 10, 2009 to participants and benefit levels as of that date. The electric discount was eliminated for management employees and retirees of HECO in August 2009, HELCO in November 2010, and MECO in August 2010, and for bargaining unit employees and retirees on January 31, 2011 per the collective bargaining agreement. The Company’s cost for OPEB has been adjusted to reflect the plan amendment, which reduced benefits. The elimination of the electric discount benefit will generate credits through other benefit costs over the next few years as the total amendment credit is amortized.

Each participating employer reserves the right to terminate its participation in the plan at any time.

Balance sheet recognition of the funded status of retirement plans.  Employers must recognize on their balance sheets the funded status of defined benefit pension and other postretirement benefit plans with an offset to AOCI in shareholders’ equity (using the projected benefit obligation (PBO), to calculate the funded status).

The PUC allowed the utilities to adopt pension and OPEB tracking mechanisms in recent rate cases. The amount of the net periodic pension cost (NPPC) and net periodic benefits costs (NPBC) to be recovered in rates is established by the PUC in each rate case. Under the utilities’ tracking mechanisms, any actual costs determined in accordance with U.S. generally accepted accounting principles that are over/under amounts allowed in rates are charged/credited to a regulatory asset/liability. The regulatory asset/liability for each utility will then be amortized over 5 years beginning with the respective utility’s next rate case. Accordingly, all retirement benefit expenses (except for executive life and nonqualified pension plan expenses, which amounted to $1.6 million in 2011) determined in accordance with U.S. generally accepted accounting principles will be recovered.

Under the tracking mechanisms, amounts that would otherwise be recorded in AOCI (excluding amounts for executive life and nonqualified pension plans), which amounts include the prepaid pension asset, net of taxes, as well as other pension and OPEB charges, are allowed to be reclassified as a regulatory asset, as those costs will be recovered in rates through the NPPC and NPBC in the future. The electric utilities have reclassified to a regulatory asset charges for retirement benefits that would otherwise be recorded in AOCI (amounting to the elimination of a potential charge/(credit) to AOCI of $165 million pretax and $55 million pretax for 2011 and 2010, respectively).

In 2007, the PUC allowed HELCO to record a regulatory asset in the amount of $12.8 million (representing HELCO’s prepaid pension asset and reflecting the accumulated pension contributions to its pension fund in excess of accumulated NPPC), which is included in rate base, and allowed recovery of that asset over a period of five years. HELCO is required to make contributions to the pension trust in the amount of the actuarially calculated NPPC that would be allowed without penalty by the tax laws.

In 2007, the PUC declined to allow HECO and MECO to include their pension assets (representing the accumulated contributions to their pension fund in excess of accumulated NPPC), in their rate bases. However, under the tracking mechanisms, HECO and MECO are required to fund only the minimum level required under the law until their pension assets are reduced to zero, at which time HECO and MECO will make contributions to the pension trust in the amount of the actuarially calculated NPPC, except when limited by the ERISA minimum contribution requirements or the maximum contribution limitations on deductible contributions imposed by the Internal Revenue Code.

The PUC’s exclusion of HECO’s and MECO’s pension assets from rate base does not allow HECO and MECO to earn a return on the pension asset, but this exclusion does not result in the exclusion of any pension benefit costs from their rates. The pension asset is to be (and has been, in the case of MECO) recovered in rates (as NPPC is recorded in excess of contributions). As of December 31, 2011, HECO’s pension asset had been reduced to $3 million.

The OPEB tracking mechanisms generally require the electric utilities to make contributions to the OPEB trust in the amount of the actuarially calculated NPBC, except when limited by material, adverse consequences imposed by federal regulations.

Retirement benefits expense for the electric utilities for 2011, 2010 and 2009 was $34 million, $39 million and $32 million, respectively.

Retirement benefit plan changes.  On March 11, 2011, the utilities’ bargaining unit employees ratified a new benefit agreement, which included changes to retirement benefits. Changes to retirement benefits for HEI and utility employees commencing employment after April 30, 2011 include a modified defined benefit plan (the Retirement Plan for Employees of Hawaiian Electric Industries, Inc. and Participating Subsidiaries) (with a lower payment formula than the formula in the plan for employees hired before May 1, 2011) and the addition of a 50% match by the applicable employer on the first 6% of employee elective deferrals by such employees through the defined contribution plan (under the Hawaiian Electric Industries Retirement Savings Plan (HEIRSP)). In addition, new eligibility rules and contribution levels applicable to existing and new HEI and utility employees were adopted for postretirement welfare benefits.In general, defined pension benefits are based on the employees’ years of service and compensation.

Defined benefit and pension and other postretirement benefit plans information.     The changes in the obligations and assets of the Company’s retirement benefit plans and the changes in AOCI (gross) for 2011 and 2010 and the funded status of these plans and amounts related to these plans reflected in the Company’s consolidated balance sheet as of December 31, 2011 and 2010 were as follows:

	2011				2010
(in thousands)	Pension benefits		Other benefits		Pension benefits		Other benefits
Benefit obligation, January 1	$1,174,534		$180,332		$1,014,287		$170,572
Service cost	35,016		4,409		28,801		4,739
Interest cost	64,966		9,534		64,527		10,378
Amendments	–		(11,365	)	–		(7,713	)
Actuarial losses	104,970		16,518		121,898		11,817
Benefits paid and expenses	(57,056	)	(8,879	)	(54,979	)	(9,461	)
Benefit obligation, December 31	1,322,430		190,549		1,174,534		180,332
Fair value of plan assets, January 1	832,356		151,117		738,971		134,608
Actual return (loss) on plan assets	(9,713	)	(2,308	)	119,446		21,271
Employer contribution	72,931		2,030		27,803		3,989
Benefits paid and expenses	(55,994	)	(7,847	)	(53,864	)	(8,751	)
Fair value of plan assets, December 31	839,580		142,992		832,356		151,117
Accrued benefit liability, December 31	(482,850	)	(47,557	)	(342,178	)	(29,215	)
AOCI, January 1 (excluding impact of PUC D&Os)	366,552		9,036		302,147		14,693
Recognized during year – net recognized transition obligation	(2	)	–		(2	)	–
Recognized during year – prior service credit	389		1,494		388		396
Recognized during year – net actuarial gains (losses)	(16,987	)	(234	)	(7,392	)	14
Occurring during year – prior service cost	–		(11,365	)	–		(7,714	)
Occurring during year – net actuarial losses	183,585		29,753		71,411		1,647
	533,537		28,684		366,552		9,036
Cumulative impact of PUC D&Os	(486,710	)	(29,183	)	(340,187	)	(10,880	)
AOCI, December 31	46,827		(499	)	26,365		(1,844	)
Net actuarial loss	534,054		48,152		367,456		18,633
Prior service gain	(518	)	(19,468	)	(907	)	(9,597	)
Net transition obligation	1		–		3		–
	533,537		28,684		366,552		9,036
Cumulative impact of PUC D&Os	(486,710	)	(29,183	)	(340,187	)	(10,880	)
AOCI, December 31	46,827		(499	)	26,365		(1,844	)
Income taxes (benefits)	(18,495	)	194		(10,403	)	717
AOCI, net of taxes (benefits), December 31	$     28,332		$      (305	)	$     15,962		$   (1,127	)

The dates used to determine retirement benefit measurements for the defined benefit plans were December 31 of 2011, 2010 and 2009.

The defined benefit pension plans with accumulated benefit obligations (ABOs), which do not consider projected pay increases (unlike the PBOs shown in the table above), in excess of plan assets as of December 31, 2011 and 2010, had aggregate ABOs of $1,182 million and $990 million, respectively, and plan assets of $840 million and $758 million, respectively.

The Pension Protection Act provides that if a pension plan’s funded status falls below certain levels, more conservative assumptions must be used to value obligations under the pension plan and restrictions on participant benefit accruals may be placed on the plan. The HEI Retirement Plan has fallen below these thresholds and the minimum required contribution estimated for 2012 incorporates the more conservative assumptions required. Other factors could cause changes to the required contribution levels.

Effective April 1, 2011, accelerated distribution options (the $50,000 single sum distribution option and a Social Security level income option) under the HEI Retirement Plan became subject to partial restrictions because the funded status of the HEI Retirement Plan was deemed to be less than 80%. Generally, while the partial restrictions are in effect, a retiring participant may only elect an accelerated distribution option for 50% of the participant’s total benefit. The partial restrictions are expected to continue through 2012.

The Company estimates that the cash funding for the qualified defined benefit pension plans in 2012 and 2013 will be $104 million and $89 million, respectively, which should fully satisfy the minimum required contributions to those plans, including requirements of the utilities pension tracking mechanisms and the Plan’s funding policy. The Company’s current estimate of contributions to the qualified defined benefit plans and all other retirement benefit plans in 2012 is $107 million.

As of December 31, 2011, the benefits expected to be paid under the retirement benefit plans in 2012, 2013, 2014, 2015, 2016, and 2017 through 2021 amounted to $69 million, $72 million, $75 million, $78 million, $82 million and $469 million, respectively.

The Company has determined the market-related value of retirement benefit plan assets by calculating the difference between the expected return and the actual return on the fair value of the plan assets, then amortizing the difference over future years – 0% in the first year and 25% in years two to five – and finally adding or subtracting the unamortized differences for the past four years from fair value. The method includes a 15% range around the fair value of such assets (i.e., 85% to 115% of fair value). If the market-related value is outside the 15% range, then the amount outside the range will be recognized immediately in the calculation of annual NPBC.

A primary goal of the plans is to achieve long-term asset growth sufficient to pay future benefit obligations at a reasonable level of risk. The investment policy target for defined benefit pension and OPEB plans reflects the philosophy that long-term growth can best be achieved by prudent investments in equity securities while balancing overall fund volatility by an appropriate allocation to fixed income securities. In order to reduce the level of portfolio risk and volatility in returns, efforts have been made to diversify the plans’ investments by asset class, geographic region, market capitalization and investment style.

The weighted-average asset allocation of defined benefit retirement plans was as follows:

	Pension benefits				Other benefits
			Investment policy				Investment policy
December 31	2011	2010	Target	Range	2011	2010	Target	Range
Asset category
Equity securities	68%	71%	70%	65-75%	69%	70%	70%	65-75%
Fixed income	32	29	30	25-35%	31	30	30	25-35%
	100%	100%	100%		100%	100%	100%

See Note 15 for additional disclosures about the fair value of the retirement benefit plans’ assets.

The following weighted-average assumptions were used in the accounting for the plans:

	Pension benefits			Other benefits
December 31	2011	2010	2009	2011	2010	2009
Benefit obligation
Discount rate	5.19%	5.68%	6.50%	4.90%	5.60%	6.50%
Rate of compensation increase	3.5	3.5	3.5	NA	NA	NA
Net periodic benefit cost (years ended)Discount rate	5.68	6.50	6.625	5.60	6.50	6.50
Expected return on plan assets	8.00	8.25	8.25	8.00	8.25	8.25
Rate of compensation increase	3.5	3.5	3.5	NA	NA	3.5

NA  Not applicable

The Company based its selection of an assumed discount rate for 2012 NPBC and December 31, 2011 disclosure on a cash flow matching analysis that utilized bond information provided by Bloomberg for all non-callable, high quality bonds (i.e., rated AA- or better) as of December 31, 2011. In selecting the expected rate of return on plan assets of 7.75% for 2012 NPBC, the Company considered economic forecasts for the types of investments held by the plans (primarily equity and fixed income investments), the Plans’ asset allocations and the past performance of the plans’ assets.

As of December 31, 2011, the assumed health care trend rates for 2012 and future years were as follows: medical, 8.5%, grading down to 5% for 2019 and thereafter; dental, 5%; and vision, 4%. As of December 31, 2010, the assumed health care trend rates for 2011 and future years were as follows: medical, 9%, grading down to 5% for 2019 and thereafter; dental, 5%; and vision, 4%.

The components of NPBC were as follows:

	Pension benefits						Other benefits
(in thousands)	2011		2010		2009		2011		2010		2009
Service cost	$ 35,016		$ 28,801		$ 25,688		$ 4,409		$ 4,739		$ 4,846
Interest cost	64,966		64,527		61,988		9,534		10,378		10,981
Expected return on plan assets	(68,901	)	(68,959	)	(57,244	)	(10,650	)	(11,101	)	(8,902	)
Amortization of net transition obligation	2		2		2		–		–		1,831
Amortization of net prior service gain	(389	)	(388	)	(387	)	(1,494	)	(396	)	(79	)
Amortization of net actuarial loss (gain)	16,987		7,392		15,847		234		(14	)	401
Net periodic benefit cost	47,681		31,375		45,894		2,033		3,606		9,078
Impact of PUC D&Os	(3,516	)	10,207		(10,570	)	2,674		5,400		(132	)
Net periodic benefit cost (adjusted for impact of PUC D&Os)	$ 44,165		$ 41,582		$ 35,324		$ 4,707		$ 9,006		$ 8,946

The estimated prior service credit, net actuarial loss and net transition obligation for defined benefit pension plans that will be amortized from AOCI or regulatory assets into net periodic pension benefit cost during 2012 are $(0.3) million, $25.7million and de minimis, respectively. The estimated prior service cost (gain), net actuarial loss and net transitional obligation for other benefit plans that will be amortized from AOCI or regulatory assets into net periodic other than pension benefit cost during 2012 are $(1.8) million, $1.8 million and nil, respectively.

The Company recorded pension expense of $32 million, $32 million and $27 million and OPEB expense of $4 million, $7 million and $7 million in 2011, 2010 and 2009, respectively, and charged the remaining amounts primarily to electric utility plant.

All pension plans and other benefits plans, with the exception of the ASB Retirement Plan at December 31, 2010, had ABO exceeding plan assets as of December 31, 2011 and December 31, 2010.

The health care cost trend rate assumptions can have a significant effect on the amounts reported for other benefits. As of December 31, 2011, a one-percentage-point increase in the assumed health care cost trend rates would have increased the total service and interest cost by $0.2 million and the accumulated postretirement benefit obligation (APBO) by $4 million, and a one-percentage-point decrease would have reduced the total service and interest cost by $0.2 million and the APBO by $5 million.

Defined contribution plans information.  The ASB 401(k) Plan is a defined contribution plan, which includes a discretionary employer profit sharing contribution (AmeriShare).

Changes to retirement benefits for HEI and utility employees commencing employment after April 30, 2011 include a reduction of benefits provided through the defined benefit plan and the addition of a 50% match by the applicable employer on the first 6% of employee deferrals through the defined contribution plan (under the Hawaiian Electric Industries Retirement Savings Plan).

For 2011, 2010 and 2009, the Company’s expense for its defined contribution pension plans under the HEIRSP and the ASB 401(k) Plan was $3 million, $4 million and $3 million, respectively, and cash contributions were $4 million for each year.