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For The Years Ended December 31, 1997, 1996 and 1995
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Note 18. Benefit Plans
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Retirement Plans. The Corporation and its subsidiaries have multiple non-contributory
defined benefit retirement plans covering most employees with minimum service requirements.
Effective January 1, 1997, the Duke Power retirement plan was amended to a plan under which
benefits are based upon a cash balance formula. Under a cash balance formula, a plan
participant accumulates a benefit based upon a percentage of current salary, which may
vary with age and years of service, and interest credits. Prior to January 1, 1997, the
Duke Power retirement plan benefits were based on an age-related formula which took into
account years of benefit accrual service and the employee’s highest average eligible earnings.
The PanEnergy plan provides retirement benefits (i) for eligible employees of certain
subsidiaries that are generally based on an employee’s years of benefit accrual service
and highest average eligible earnings, and (ii) for eligible employees of certain other
subsidiaries under a cash balance formula.
The Corporation’s policy is to fund amounts, as necessary, on an actuarial basis to
provide assets sufficient to meet benefits to be paid to plan members. On December 30,
1997 assets and related liabilities of $235.6 million and $204 million, respectively,
for certain PanEnergy participants were transferred to the Duke Power plan. As a result
of this transfer, no contributions to the Duke Power plan were necessary in 1997.
Net periodic pension cost includes the following components for the years ended
December 31, 1997, 1996 and 1995:
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In Millions |
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1997 |
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1996 |
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1995 |
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Actual return on plan assets |
$ |
( 455.3 |
) |
$ |
( 302.6 |
) |
$ |
( 413.1 |
) |
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Amount deferred for recognition |
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246.5 |
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110.4 |
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237.4 |
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Expected return on plan assets |
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( 208.8 |
) |
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( 192.2 |
) |
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( 175.7 |
) |
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Service cost benefit earned during the year
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62.2 |
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62.7 |
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57.8 |
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Interest cost on projected benefit obligation
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163.7 |
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152.8 |
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147.9 |
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Net amortization |
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7.8 |
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6.4 |
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3.3 |
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Net periodic pension cost |
$ |
24.9 |
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$ |
29.7 |
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$ |
33.3 |
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A reconciliation of the funded status of the plans to the amounts recognized in the
Consolidated Balance Sheets as of December 31, 1997 and 1996 is as follows:
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Accumulated benefit obligation |
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Vested benefits |
$ |
( 2,011.9 |
) |
$ |
( 1,814.9 |
) |
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Nonvested benefits |
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( 18.3 |
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( 26.7 |
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Accumulated benefit obligation |
$ |
( 2,030.2 |
) |
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( 1,841.6 |
) |
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Fair market value of plan assetsa |
$ |
2,724.7 |
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$ |
2,445.3 |
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Projected benefit obligation |
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( 2,372.1 |
) |
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( 2,126.4 |
) |
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Unrecognized net experience loss |
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81.3 |
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123.1 |
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Unrecognized prior service cost reduction |
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( 64.8 |
) |
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( 45.1 |
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Unrecognized net asset |
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( 31.6 |
) |
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( 36.3 |
) |
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Pre-funded pension cost |
$ |
337.5 |
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$ |
360.6 |
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a Principally equity and fixed income securities
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Assumptions used in the Corporation’s pension accounting (reflecting weighted averages
across all plans) include:
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Percent (%) |
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1997 |
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1996 |
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1995 |
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Discount rate |
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7.25 |
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7.50 |
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7.50 |
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Salary increase |
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4.15 |
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4.80 |
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4.81 |
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Expected long-term rate of return on plan assets
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9.25 |
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9.18 |
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9.18 |
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During 1995, the Corporation offered to certain employees an Enhanced Vested Benefits
program (EVB). The Corporation recorded an additional one-time expense for special termination
benefits associated with the EVB of approximately $42.2 million, including $21.6 million of
additional retirement plan costs.
The Corporation also sponsors employee savings plans which cover substantially all
employees. The Corporation expensed plan contributions of $52.8 million, $34.8 million
and $34.9 million in 1997, 1996 and 1995, respectively.
Other Postretirement Benefits. The Corporation and most of its subsidiaries provide
certain health care and life insurance benefits for retired employees on a contributory and
non-contributory basis. Employees become eligible for these benefits if they have met certain
age and service requirements at retirement, as defined in the plans.
The Corporation accrues such benefit costs over the active service period of employees
to the date of full eligibility for the benefits. The net unrecognized transition obligation,
resulting from the implementation of accrual accounting, is being amortized over approximately
20 years.
The Corporation is using an investment account under section 401(h) of the Internal
Revenue Code, a retired lives reserve (RLR) and multiple voluntary employees’ beneficiary
association (VEBA) trusts under section 501(c)(9) of the Internal Revenue Code to partially
fund postretirement benefits. The 401(h) vehicles, which provide for tax deductions for
contributions and tax-free accumulation of investment income, partially fund the Corporation’s
postretirement health care benefits. The Corporation uses the RLR, which has tax attributes
similar to 401(h) funding, to partially fund its postretirement life insurance obligations.
Certain subsidiaries use the VEBA trusts to partially fund accrued postretirement health care
benefits and fund postretirement life insurance obligations.
Net periodic postretirement benefit cost of the plans include the following components
for the years ended December 31, 1997, 1996 and 1995:
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In Millions |
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1997 |
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1996 |
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1995 |
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Actual return on plan assets |
$ |
( 45.1 |
) |
$ |
( 20.5 |
) |
$ |
( 29.6 |
) |
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Amount deferred for recognition |
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26.4 |
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4.2 |
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16.2 |
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Expected return on plan assets |
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( 18.7 |
) |
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( 16.3 |
) |
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( 13.4 |
) |
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Service cost benefit earned during the year
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10.0 |
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8.4 |
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7.6 |
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Interest cost on accumulated postretirement benefit obligation
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|
46.2 |
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|
43.3 |
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43.5 |
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Net amortization |
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20.3 |
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19.3 |
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16.5 |
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Net periodic postretirement benefit cost
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$ |
57.8 |
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$ |
54.7 |
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$ |
54.2 |
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A reconciliation of the funded status of the plans to the amounts recognized in the
Consolidated Balance Sheets as of December 31, 1997 and 1996 is as follows:
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Accumulated postretirement benefit obligation |
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Retirees |
$ |
( 428.6 |
) |
$ |
( 440.5 |
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Fully eligible active plan participants |
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( 57.0 |
) |
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( 42.6 |
) |
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Other active plan participants |
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( 181.4 |
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( 158.6 |
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Accumulated post retirement benefit obligation
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( 667.0 |
) |
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( 641.7 |
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Fair market value of plan assetsa |
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266.2 |
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225.3 |
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Unrecognized prior service cost |
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64.6 |
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66.7 |
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Unrecognized net experience loss |
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3.7 |
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27.0 |
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Unrecognized transitional obligation |
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255.9 |
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273.0 |
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Accrued postretirement benefit cost |
$ |
( 76.6 |
) |
$ |
( 49.7 |
) |
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a Principally equity and fixed income securities
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Assumptions used in the Corporation’s postretirement benefits accounting (reflecting
weighted-averages across all plans) include:
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Percent (%) |
|
1997 |
|
1996 |
|
1995 |
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Discount rate |
|
7.25 |
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|
7.50 |
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7.50 |
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Salary increase |
|
4.33 |
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|
4.84 |
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4.84 |
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Expected long-term rate of return on 401(h) assets
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9.25 |
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|
9.00 |
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|
9.00 |
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Expected long-term rate of return on RLR assets
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6.75 |
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|
6.50 |
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8.00 |
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Expected long-term rate of return on VEBA assets
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9.25 |
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9.50 |
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9.50 |
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Assumed tax ratea
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39.60 |
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39.60 |
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39.60 |
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a Health care portion of postretirement benefits in VEBAtrusts.
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The weighted-average health care cost trend rate used to estimate postretirement benefits
was 7.75% in 1997. This rate is expected to decrease, with a 4.75% weighted-average ultimate
trend rate expected to be achieved by 2005. The effect of a 1% increase in the assumed health
care cost trend rate for each future year would result in a $2.4 million increase in the
annual aggregate postretirement benefit cost and a $29.5 million increase in the accumulated
postretirement benefit obligation at December 31, 1997.
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| Continue to Note 19. Quarterly Financial Data (Unaudited) |
| Back to Notes to Consolidated Financial Statements Table of Contents |
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