Retirement Benefits

PSE has a defined benefit pension plan (Qualified Pension Benefits) covering a substantial majority 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 United Association of Journeyman and Apprentices of the Plumbing and Pipefitting Industry (UA) represented employees will receive annual pay contributions of 4.0% of eligible pay each year in the cash balance formula plan of the defined benefit pension. Starting January 1, 2014, for non-represented employees, and December 12, 2014 for employees represented by the IBEW, participants will receive annual employer contributions of 4.0% of eligible pay each year in the cash balance formula of the defined benefit pension or 401k plan account. Those employees receiving contributions in the cash balance formula plan also receive interest credits, which are at least 1.0% per quarter. When an employee with a vested cash balance formula benefit leaves PSE, they will have annuity and lump sum options for distribution. 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's retirement plans were remeasured as a result of the merger in 2009, which represents the difference between Puget Energy and PSE's retirement plans.

In March 2017, the FASB issued ASU 2017-07, requiring that an employer report the service cost component in the same line items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost (which include interest costs, expected return on plan assets, amortization of prior service cost or credits and actuarial gains and losses) are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. Pursuant to the standard, the Company has retrospectively included in the consolidated statements of income: (i) the components of service cost within utility operations and maintenance for PSE and within non-utility expense and other for Puget Energy, and (ii) all non-service cost components in other income.

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, 2018 and 2017:



Puget Energy and Puget Sound Energy	Qualified Pension Benefits						SERP Pension Benefits						Other Benefits
(Dollars in Thousands)	2018			2017			2018			2017			2018			2017
Change in benefit obligation:
Benefit obligation at beginning of period	$	700,481		$	652,607		$	55,754		$	51,734		$	11,454		$	11,194
Amendments	—			—			1,446			—			—			—
Service cost	22,757			20,081			847			913			69			72
Interest cost	27,303			28,373			2,120			2,285			444			500
Actuarial loss (gain)	(29,067		)	40,945			1,122			2,722			(379		)	725
Benefits paid	(42,662		)	(40,594		)	(5,581		)	(1,900		)	(1,037		)	(1,137		)
Medicare part D subsidy received	—			—			—			—			85			100
Administrative expense	(1,169		)	(931		)	—			—			—			—
Benefit obligation at end of period	$	677,643		$	700,481		$	55,708		$	55,754		$	10,636		$	11,454



Puget Energy and Puget Sound Energy	Qualified Pension Benefits						SERP Pension Benefits						Other Benefits
(Dollars in Thousands)	2018			2017			2018			2017			2018			2017
Change in plan assets:
Fair value of plan assets at beginning of period	$	704,360		$	620,260		$	—		$	—		$	7,138		$	7,200
Actual return on plan assets	(38,379		)	107,836			—			—			(395		)	784
Employer contribution	18,000			18,000			5,581			1,900			254			291
Benefits paid	(42,662		)	(40,594		)	(5,581		)	(1,900		)	(1,037		)	(1,137		)
Administrative expense	(1,077		)	(1,142		)	—			—			—			—
Fair value of plan assets at end of period	$	640,242		$	704,360		$	—		$	—		$	5,960		$	7,138
Funded status at end of period	$	(37,401	)	$	3,879		$	(55,708	)	$	(55,754	)	$	(4,676	)	$	(4,316	)



Puget Energy and Puget Sound Energy	Qualified Pension Benefits					SERP Pension Benefits						Other Benefits
(Dollars in Thousands)	2018			2017		2018			2017			2018			2017
Amounts recognized in Statement of Financial Position consist of:
Noncurrent assets	$	—		$	3,879	$	—		$	—		$	—		$	—
Current liabilities	—			—		(6,249		)	(5,486		)	(332		)	(317		)
Noncurrent liabilities	(37,401		)	—		(49,459		)	(50,268		)	(4,344		)	(3,999		)
Net assets (liabilities)	$	(37,401	)	$	3,879	$	(55,708	)	$	(55,754	)	$	(4,676	)	$	(4,316	)



Puget Energy and Puget Sound Energy	Qualified Pension Benefits				SERP Pension Benefits				Other Benefits
(Dollars in Thousands)	2018		2017		2018		2017		2018		2017
Pension Plans with an Accumulated Benefit Obligation in excess of Plan Assets:
Projected benefit obligation	$	677,643	$	700,481	$	55,708	$	55,754	$	10,636	$	11,454
Accumulated benefit obligation	668,469		688,908		51,031		52,681		10,557		11,367
Fair value of plan assets	640,242		704,360		—		—		5,960		7,138

The following tables summarize Puget Energy's and PSE's pension benefit amounts recognized in AOCI for the years ended December 31, 2018 and 2017:



Puget Energy	Qualified Pension Benefits						SERP Pension Benefits				Other Benefits
(Dollars in Thousands)	2018			2017			2018		2017		2018			2017
Amounts recognized in Accumulated Other Comprehensive Income consist of:
Net loss (gain)	$	94,929		$	37,693		$	9,612	$	10,689	$	(2,564	)	$	(3,386	)
Prior service cost (credit)	(5,863		)	(7,843		)	1,607		204		—			—
Total	$	89,066		$	29,850		$	11,219	$	10,893	$	(2,564	)	$	(3,386	)



Puget Sound Energy	Qualified Pension Benefits						SERP Pension Benefits				Other Benefits
(Dollars in Thousands)	2018			2017			2018		2017		2018			2017
Amounts recognized in Accumulated Other Comprehensive Income consist of:
Net loss (gain)	$	229,819		$	185,277		$	11,450	$	13,134	$	(3,857	)	$	(4,901	)
Prior service cost (credit)	(4,659		)	(6,232		)	1,609		208		—			—
Total	$	225,160		$	179,045		$	13,059	$	13,342	$	(3,857	)	$	(4,901	)

The following tables summarize Puget Energy's and PSE's net periodic benefit cost for the years ended December 31, 2018, 2017 and 2016:



Puget Energy	Qualified Pension Benefits									SERP Pension Benefits						Other Benefits
(Dollars in Thousands)	2018			2017			2016			2018		2017		2016		2018			2017			2016
Components of net periodic benefit cost:
Service cost	$	22,757		$	20,081		$	18,913		$	847	$	913	$	1,085	$	69		$	72		$	93
Interest cost	27,303			28,373			28,689			2,120		2,285		2,325		444			500			533
Expected return on plan assets	(50,202		)	(47,784		)	(46,619		)	—		—		—		(472		)	(461		)	(446		)
Amortization of prior service cost (credit)	(1,980		)	(1,980		)	(1,980		)	1,580		42		42		—			—			—
Amortization of net loss (gain)	2,187			—			—			42		1,077		911		(335		)	(402		)	(386		)
Net periodic benefit cost	$	65		$	(1,310	)	$	(997	)	$	4,589	$	4,317	$	4,363	$	(294	)	$	(291	)	$	(206	)



Puget Sound Energy	Qualified Pension Benefits									SERP Pension Benefits						Other Benefits
(Dollars in Thousands)	2018			2017			2016			2018		2017		2016		2018			2017			2016
Components of net periodic benefit cost:
Service cost	$	22,757		$	20,081		$	18,913		$	847	$	913	$	1,085	$	69		$	72		$	93
Interest cost	27,303			28,373			28,689			2,120		2,285		2,325		444			500			533
Expected return on plan assets	(50,240		)	(47,862		)	(46,814		)	—		—		—		(472		)	(461		)	(446		)
Amortization of prior service cost (credit)	(1,573		)	(1,573		)	(1,573		)	44		44		44		—			—			—
Amortization of net loss (gain)	14,917			13,048			15,257			2,069		1,565		1,330		(556		)	(641		)	(632		)
Net periodic benefit cost	$	13,164		$	12,067		$	14,472		$	5,080	$	4,807	$	4,784	$	(515	)	$	(530	)	$	(452	)

The following tables summarize Puget Energy's and PSE's benefit obligations recognized in other comprehensive income (OCI) for the years ended December 31, 2018 and 2017:



Puget Energy	Qualified Pension Benefits						SERP Pension Benefits						Other Benefits
(Dollars in Thousands)	2018			2017			2018			2017			2018		2017
Other changes (pre-tax) in plan assets and benefit obligations recognized in other comprehensive income:
Net loss (gain)	$	59,422		$	(18,896	)	$	1,122		$	2,722		$	488	$	403
Amortization of net (loss) gain	(2,187		)	—			(1,580		)	(1,076		)	335		401
Settlements, mergers, sales, and closures	—			—			(619		)	—			—		—
Prior service cost (credit)	—			—			1,446			—			—		—
Amortization of prior service (cost) credit	1,980			1,980			(42		)	(42		)	—		—
Total change in other comprehensive income for year	$	59,215		$	(16,916	)	$	327		$	1,604		$	823	$	804



Puget Sound Energy	Qualified Pension Benefit						SERP Pension Benefits						Other Benefits
(Dollars in Thousands)	2018			2017			2018			2017			2018		2017
Other changes (pre-tax) in plan assets and benefit obligations recognized in other comprehensive income:
Net loss (gain)	$	59,460		$	(18,817	)	$	1,122		$	2,722		$	488	$	452
Amortization of net (loss) gain	(14,917		)	(13,048		)	(2,069		)	(1,565		)	556		641
Settlements, mergers, sales, and closures	—			—			(737		)	—			—		—
Prior service cost (credit)	—			—			1,446			—			—		—
Amortization of prior service (cost) credit	1,573			1,573			(44		)	(44		)	—		—
Total change in other comprehensive income for year	$	46,116		$	(30,292	)	$	(282	)	$	1,113		$	1,044	$	1,093

The estimated net (loss) gain and prior service cost (credit) for the pension plans that will be amortized from AOCI into net periodic benefit cost in 2019 by PSE include a $12.7 million net loss and a $1.6 million credit, respectively. The estimated net (loss) gain for the SERP that will be amortized from AOCI into net periodic benefit cost in 2019 is a net loss of $1.7 million. The estimated prior service cost (credit) for the SERP that will be amortized from AOCI into net periodic benefit cost in 2019 is a net loss of $0.3 million. The estimated net (loss) gain and prior service cost (credit) for the other postretirement plans that will be amortized from AOCI into net periodic benefit cost in 2019 is a net loss of $0.4 million. For Puget Energy, the overall amounts expected to be amortized from AOCI into net period benefit cost in 2019 is a net loss of $0.5 million.

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, 2019 are expected to be at least $18.0 million, $6.2 million and $0.3 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	2018		2017		2016		2018		2017		2016		2018		2017		2016
Discount rate	4.40	%	4.00	%	4.50	%	4.40	%	4.00	%	4.50	%	4.40	%	4.00	%	4.50	%
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	—		—		—		—		—		—		7.60		6.80		8.80
Benefit Cost Assumptions
Discount rate	4.40	%	4.50	%	4.65	%	4.40	%	4.50	%	4.65	%	4.40	%	4.50	%	4.65	%
Return on plan assets	7.50		7.45		7.75		—		—		—		7.00		6.75		6.75
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	—		—		—		—		—		—		7.60		9.50		5.30

The assumed medical inflation rate used to determine benefit obligations is 7.60% in 2019 grading down to 3.90% in 2020. A 1.0% change in the assumed medical inflation rate would have the following effects:



	2018					2017
(Dollars in Thousands)	1% Increase		1% Decrease			1% Increase		1% Decrease
Effect on post-retirement benefit obligation	$	19	$	(18	)	$	23	$	(22	)
Effect on service and interest cost components	1		(1		)	1		(1		)

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 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)	2019		2020		2021		2022		2023		2024-2027
Qualified Pension total benefits	$	43,700	$	45,100	$	45,900	$	47,100	$	48,500	$	252,400
SERP Pension total benefits	6,249		4,993		1,887		5,378		3,678		39,400
Other Benefits total with Medicare Part D subsidy	1,112		1,094		1,064		1,038		1,008		4,410
Other Benefits total without Medicare Part D subsidy	892		863		899		872		841		3,704

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	—		9		15
Non-U.S. equity	10		25		30
Fixed income	15		25		30
Real estate	—		—		10
Absolute return	5		10		15
Cash	—		—		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: (i) how investment allocation decisions are made, including the factors that are pertinent to an understanding of investment policies and strategies; (ii) major categories of plan assets; (iii) inputs and valuation techniques used to measure the fair value of plan assets; (iv) effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets for the period; and (v) 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, 2018 and 2017:



	Recurring Fair Value Measures						Recurring Fair Value Measures
	As of December 31, 2018						As of December 31, 2017
(Dollars in Thousands)	Level 1		Level 2		Total		Level 1		Level 2		Total
Assets:
Mutual Funds	$	103,661	$	—	$	103,661	$	117,796	$	—	$	117,796
Common Stock	177,949		—		177,949		209,504		—		209,504
Government Securities	—		—		—		18,316		23,782		42,098
Corporate Bonds	—		—		—		—		34,588		34,588
Cash and cash equivalents	—		702		702		2,684		9,304		11,988
Subtotal	$	281,610	$	702	282,312		$	348,300	$	67,674	415,974
Investments measured at NAV¹					356,586						237,427
Net (payable) receivable					1,345						50,959
Total assets					$	640,243					$	704,360

_______________

In accordance with ASU 2015-07, "Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent)", certain investments that were measured at NAV per share (or its equivalent) have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the line items presented in the statement of net assets available for benefits. Investments measured at NAV primarily consist of common/collective trust funds and two partnerships held as of December 31, 2018.

Mesirow Institutional Multi-Strategy Fund Partnership, L.P. utilizes a combination of long and short strategies through investments in investment funds. The major strategy allocations of the investment funds include (1) Investments in debt obligations of public and private entities; typically, in financial duress, and (2) Investments in equity positions on a global basis utilizing fundamental analysis.

Grosvenor Institutional Partners Fund, L.P invests substantially all of the fund assets available in the Grosvenor Master Fund, a Cayman Islands exempted company which is sponsored, managed and has the same investment objective as the Partnership fund. In addition to the Master Fund, investments are made primarily in offshore investment funds, investment partnerships, and pooled investment vehicles; collectively referred to as Portfolio Funds, which generally implement "nontraditional" or "alternative" investment strategies.

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, 2018						As of December 31, 2017
(Dollars in Thousands)	Level 1		Level 2		Total		Level 1		Level 2		Total
Assets:
Mutual fund¹	$	5,910	$	—	$	5,910	$	7,089	$	—	$	7,089
Investments measured at NAV²					50						49
Total assets					$	5,960					$	7,138

_______________


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, 2018.

In accordance with ASU 2015-07, "Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent)", certain investments that were measured at NAV per share (or its equivalent) have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the line items presented in the statement of net assets available for benefits. Investments measured at NAV consist of a common/collective trust fund as of December 31, 2018.