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, in the case of the HEI/HECO Pension Plan, benefits for utility union employees determined in accordance with the terms of the collective bargaining agreements between the utilities and the union. 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 under “Defined benefit pension and other postretirement benefit plans information” 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 amendments, 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 HECO Benefits 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 each of 2011 and 2012) 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 to AOCI of $124 million pretax and $165 million pretax for 2012 and 2011, 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, 2012, HECO’s pension asset had been reduced to $2 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 2012, 2011 and 2010 was $32 million, $34 million and $39 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 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 2012 and 2011 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, 2012 and 2011 were as follows:

	2012				2011
(in thousands)	Pension benefits		Other benefits		Pension benefits		Other benefits
Benefit obligation, January 1	$1,322,430		$190,549		$1,174,534		$180,332
Service cost	43,221		4,211		35,016		4,409
Interest cost	67,480		9,009		64,966		9,534
Amendments	–		–		–		(11,365	)
Actuarial losses (gains)	217,205		(1,991	)	104,970		16,518
Benefits paid and expenses	(60,032	)	(7,643	)	(57,056	)	(8,879	)
Benefit obligation, December 31	1,590,304		194,135		1,322,430		190,549
Fair value of plan assets, January 1	839,580		142,992		832,356		151,117
Actual return (loss) on plan assets	115,794		18,477		(9,713	)	(2,308	)
Employer contributions	74,923		2,780		72,931		2,030
Benefits paid and expenses	(58,983	)	(7,518	)	(55,994	)	(7,847	)
Fair value of plan assets, December 31	971,314		156,731		839,580		142,992
Accrued benefit liability, December 31	(618,990	)	(37,404	)	(482,850	)	(47,557	)
AOCI, January 1 (excluding impact of PUC D&Os)	533,537		28,684		366,552		9,036
Recognized during year – net recognized transition obligation	(1	)	–		(2	)	–
Recognized during year – prior service credit	325		1,793		389		1,494
Recognized during year – net actuarial losses	(25,675	)	(1,498	)	(16,987	)	(234	)
Occurring during year – prior service cost	–		–		–		(11,365	)
Occurring during year – net actuarial losses (gains)	172,595		(10,133	)	183,585		29,753
	680,781		18,846		533,537		28,684
Cumulative impact of PUC D&Os	(621,310	)	(18,123	)	(486,710	)	(29,183	)
AOCI, December 31	59,471		723		46,827		(499	)
Net actuarial loss	680,973		36,521		534,054		48,152
Prior service gain	(192	)	(17,675	)	(518	)	(19,468	)
Net transition obligation	–		–		1		–
	680,781		18,846		533,537		28,684
Cumulative impact of PUC D&Os	(621,310	)	(18,123	)	(486,710	)	(29,183	)
AOCL(AOCI), December 31	59,471		723		46,827		(499	)
Income taxes (benefits)	(23,489	)	(281	)	(18,495	)	194
AOCL(AOCI), net of taxes (benefits), December 31	$ 35,982		$ 442		$ 28,332		$ (305	)

The dates used to determine retirement benefit measurements for the defined benefit plans were December 31 of 2012, 2011 and 2010.

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, 2012 and 2011, had aggregate ABOs of $1,383 million and $1,182 million, respectively, and plan assets of $971 million and $840 million, respectively.

On July 6, 2012, President Obama signed the Moving Ahead for Progress in the 21st Century Act (MAP-21), which included provisions related to the funding and administration of pension plans. This law does not affect the Company’s accounting for pension benefits; therefore, the net periodic benefit costs disclosed for the plans were not affected. The Company elected to apply MAP-21 for 2012, which reduced the 2012 minimum funding requirement and lifted the restrictions on accelerated distribution options (which restrictions were in effect April 1, 2011 to September 30, 2012) for HEI and HECO and its subsidiaries. If the Adjusted Funding Target Attainment Percentage falls below 80% in the future, the restrictions on accelerated distribution options may apply again.

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. The HEI Retirement Plan fell below these thresholds in 2011 and the minimum required contribution for 2012 incorporated the more conservative assumptions required. Other factors could cause changes to the required contribution levels.

The Company estimates that the cash funding for the qualified defined benefit pension plans in 2013 will be $85 million, 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 its pension and other postretirement benefit plans in 2013 is $86 million.

As of December 31, 2012, the benefits expected to be paid under all retirement benefit plans in 2013, 2014, 2015, 2016, 2017 and 2018 through 2022 amounted to $69 million, $72 million, $74 million, $77 million, $81 million and $460 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	2012		2011		Target		Range		2012		2011		Target		Range
Asset category
Equity securities	69	%	68	%	70	%	65-75	%	70	%	69	%	70	%	65-75	%
Fixed income	31		32		30		25-35	%	30		31		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	2012		2011		2010		2012		2011		2010

Benefit obligation Discount rate	4.13	%	5.19	%	5.68	%	4.07	%	4.90	%	5.60	%
Rate of compensation increase	3.5		3.5		3.5		NA		NA		NA
Net periodic benefit cost (years ended) Discount rate	5.19		5.68		6.50		4.90		5.60		6.50
Expected return on plan assets	7.75		8.00		8.25		7.75		8.00		8.25
Rate of compensation increase	3.5		3.5		3.5		NA		NA		NA

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, industry and corporate surveys and the past performance of the plans’ assets.

As of December 31, 2012, the assumed health care trend rates for 2013 and future years were as follows: medical, 8%, grading down to 5% for 2019 and thereafter; dental, 5%; and vision, 4%. 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%. Medicare Advantage reimbursements are expected to phase out by 2016; therefore, post age 65 medical trends are adjusted to reflect anticipated increases above the ordinary medical trend rates. For post age 65, the medical trend is 4% higher than pre-65 for 2012 through 2014 and 3% higher in 2015.

The components of NPBC were as follows:

	Pension benefits						Other benefits
(in thousands)	2012		2011		2010		2012		2011		2010

Service cost	$ 43,221		$ 35,016		$ 28,801		$ 4,211		$ 4,409		$ 4,739
Interest cost	67,480		64,966		64,527		9,009		9,534		10,378
Expected return on plan assets	(71,183	)	(68,901	)	(68,959	)	(10,336	)	(10,650	)	(11,101	)
Amortization of net transition obligation	1		2		2		–		–		–
Amortization of net prior service gain	(325	)	(389	)	(388	)	(1,793	)	(1,494	)	(396	)
Amortization of net actuarial loss (gain)	25,675		16,987		7,392		1,498		234		(14	)
Net periodic benefit cost	64,869		47,681		31,375		2,589		2,033		3,606
Impact of PUC D&Os	(15,754	)	(3,516	)	10,207		(2,227	)	2,674		5,400
Net periodic benefit cost (adjusted for impact of PUC D&Os)	$ 49,115		$ 44,165		$ 41,582		$ 362		$ 4,707		$ 9,006

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 2013 are $(0.1) million, $39.3 million and nil, 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 2013 are $(1.8) million, $2.1 million and nil, respectively.

The Company recorded pension expense of $35 million, $32 million and $32 million and OPEB expense of $1 million, $4 million and $7 million in 2012, 2011 and 2010, respectively, and charged the remaining amounts primarily to electric utility plant.

All pension plans and other benefits plans had ABO exceeding plan assets as of December 31, 2012 and 2011.

The health care cost trend rate assumptions can have a significant effect on the amounts reported for other benefits. As of December 31, 2012, 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 $5.7 million, and a one-percentage-point decrease would have reduced the total service and interest cost by $0.3 million and the APBO by $5.8 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 2012, 2011 and 2010, the Company’s expense for its defined contribution pension plans under the HEIRSP and the ASB 401(k) Plan was $4 million, $3 million and $4 million, respectively, and cash contributions were $4 million for each year.