compensation, wages, benefits - hydro one · 2017-02-23 · compensation, wages, benefits 1.0...

Filed: September 30, 2008 EB-2008-0272 Exhibit C1 Tab 3 Schedule 2 of 17

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COMPENSATION, WAGES, BENEFITS

1.0 INTRODUCTION

In earlier Distribution and Transmission decisions, the Board has expressed concerns

regarding the size and growth of compensation at Hydro One. Hydro One understands

these concerns and appropriate measures have been taken, where possible, to reduce

compensation related items. The fact remains, though, that Hydro One employs a highly

skilled workforce and coupled with an aging workforce and world wide demand for

similar skills, compensation at Hydro One is appropriate and reasonable. Ultimately, the

rate payers benefit from the quality, expertise and reliability of Hydro One employees.

The two primary human resource issues at Hydro One are appropriate compensation

levels and ensuring the right skills and mix of staff are available in the short and long

term.

The overall compensation package at Hydro One is a product of historical factors as well

as current and future challenges. Hydro One is heavily unionized and the work force is

comprised of highly skilled and trained employees. With the de-merger of Ontario Hydro

in 1999, Hydro One inherited collective agreements that already established terms and

conditions of employment for represented employees. Since its formation, Hydro One

has a history of managing collective bargaining in an effective manner by balancing the

needs to reduce costs, increase productivity and settling collective agreements which the

unions can support and ratify with its membership. Compensation at Hydro One is

appropriate and reasonable given this history and context in which the Company

operates.


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2.0 THE UNIONIZED ENVIRONMENT

Approximately 90 % of the work force is unionized. By law, Hydro One must negotiate

collective agreements with each of its bargaining agents. The collective agreements

establish the terms and conditions of the employment relationship for a fixed period of

time. Typical terms of the collective agreement include wages, benefits, vacation, hours

of work, contracting out, grievance and arbitration procedure etc. It is noteworthy to

highlight that Hydro One inherited collective agreements from Ontario Hydro which had

already established many of these terms of employment. It is only through the bargaining

process that these terms of employment could be altered. The ability of an employer in

an unionized environment to successfully reduce compensation and benefits is limited.

Organizations like Stelco Inc., Air Canada or the major North American auto

manufacturers have negotiated some concessions but only when faced with bankruptcy

protection or plant closures.

Collective Agreements are legally enforceable contracts. In labour agreements, more so

than commercial contracts, parties to this type of contract must also consider their longer

term relationship. Hydro One practices sound and prudent labour relations by negotiating

fair and reasonable collective agreements to foster and promote healthy union –

management relationships. Ultimately, the rate payer is a beneficiary of this relationship

in the form of higher productivity and uninterrupted supply of power.

3.0 LABOUR AGREEMENTS

Hydro One has collective agreements with the Power Workers’ Union (PWU), The

Society of Energy Professionals (The Society), the Canadian Union of Skilled Workers

(CUSW), the Labourer’s International Union of North America ( LIUNA) and each of the


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15 Building Trade Unions (BTU’s) (via EPSCA). The key agreements are with the PWU

and the Society.

Hydro One’s relationship with the PWU goes back to 1944 with the formation of the

Employee’s Association of Ontario Hydro. The PWU represent over 15 000 employees

primarily in the successor companies to Ontario Hydro and other utilities in the Province.

The PWU represent over 70% of Hydro One employees. The PWU is an industrial union

that represents the trades, operators, technicians and clerical workers. They perform line

work, forestry, electrical, mechanical, protection and control, meter reading, stock

keeping, system operation, technical and clerical/administrative work. The majority of

the PWU-represented employees in Hydro One have post-secondary education,

predominately at the community college level. These include Hydro One electrical

maintainers, line maintainers, mechanical maintainers, operators, technicians and

administrative employees.

Hydro One’s relationship with the Society goes back over 50 years. Until 1991, the

Society represented various professional staff on a voluntary basis. In 1991, Ontario

Hydro voluntary recognized the Society as the legal bargaining agent for engineers,

technical, administrative and supervisory staff. The first collective agreement was

negotiated in 1992.

Society represented staff perform engineering, high level technical and administrative

work as well as supervisory functions. The majority of the Society-represented

employees in Hydro One have either post-secondary education (university degrees)

and/or post-graduate education. These include graduate engineers, finance and

telecommunication specialists.


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It is often perceived that unions are associated with high salaries, superior benefits and

impeding management from being efficient. Hydro One’s human resource philosophy is

to work cooperatively and reasonably with all of its bargaining agents to ensure employee

engagement is maximized while achieving business objectives. Input is sought from both

bargaining agents and employees to develop ongoing programs and methods of reducing

costs and increasing productivity. As in any union-management relationship, from time

to time, the parties have disputes. Overall, Hydro One’s relationships with all the

bargaining agents can be described as mature and business like. The fact that Hydro One

has made progress in both cost reduction and increased flexibility with its represented

groups is an indicator of a positive and productive relationship. By operating in this

manner, unionization at Hydro One can act as a positive influence for both the Hydro

One and the ratepayer.

It is also believed that unions have an impact on non represented staff by putting upward

pressure on compensation and benefits. Historically, this may have been true at Ontario

Hydro where it was stated policy that non represented staff would be treated as good or

better than represented staff. As an example, non represented salaries were generally

adjusted in line with increases negotiated with the bargaining agents. At Hydro One,

compensation and benefits afforded to non represented staff are not impacted by

negotiations with represented staff.

4.0 COLLECTIVE BARGAINING

With the break up of Ontario Hydro in 1998, Hydro One inherited collective agreements

with established terms and conditions. Since this time, Hydro One has been able to

negotiate collective agreements that meet our business needs. Progress has been made in

terms of reducing employee related costs and increasing flexibility.


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4.1 PWU

The PWU contract has been reduced in size and complexity since it was inherited from

Ontario Hydro in 1999 in order to provide Management with the flexibility to direct and

effectively utilize the workforce. However, wage rates, pension entitlements, and benefit

coverage are prescribed and can be changed only through negotiations.

Compensation of PWU-represented employees is negotiated through the collective

bargaining process. An aging workforce in technical and trades positions in the utility

industry is likely to limit the supply of skilled staff in the future, putting upward pressure

on wages.

The common view is that an attempt by Hydro One to achieve significant cost reductions

in wages, benefits and pension would likely result in a strike. The last PWU strike was in

1985 and lasted 12 days. It was handled by placing management and Society-represented

staff in key functions to maintain operations/service to the extent possible. However, as a

result of numerous downsizing programs, and reorganization of work, there are far fewer

management staff available today with the requisite skills and experience to occupy key

PWU positions during a strike. Furthermore, unlike other industry’s, Hydro One does not

have a product that can be stockpiled. As a result, the Company would be unable to

continue operations for a sustained period of time during a PWU strike.

Rather than risk jeopardizing the supply of reliable electricity, the key focus with respect

to the PWU has been to achieve increased management flexibility to run the operations,

as opposed to wide scale reductions in wages, benefits and pensions.

4.2 SOCIETY

The Society had mandatory mediation/arbitration since the formation of Hydro One until

2005. Mandatory arbitration is another legacy issue, that entrenched terms and


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conditions into Society collective agreements that were inherited by Hydro One. Interest

arbitrators are generally reluctant to award cost concessions. Recently, the C.D. Howe

Institute issued a study that examined the impact on wages when declaring a service an

‘essential service’.[1] Services that are deemed essential service do not have the ability to

strike. Collective bargaining disputes are resolved using mandatory interest arbitration.

This study concluded that essential service designation resulted in higher wage increases

than would otherwise have occurred in traditional collective bargaining. Hydro One

ended mandatory arbitration commencing with the 2005 collective bargaining. The

resultant settlement is more responsive to achieving compensation related cost

reductions.

Hydro One’s goal is to compensate Society-represented staff at levels competitive in the

market place in order to maintain the ability to attract, motivate and retain competent

staff. For the utility industry, an aging workforce within operations management and

specialist engineering positions is likely to limit the supply of skilled employees in the

coming years, putting upward pressure on compensation.

In establishing rates for Society-represented staff, Hydro One considers the average

industrial wage settlements, Consumer Price Index, and survey results from the Ontario

Society of Professional Engineers. This survey is used as a major data source since

engineers are the single biggest classification within the Society. As an employer, Hydro

One focuses on the marketplace more than on inflation. Hydro One’s goal is to occupy a

position in that marketplace in order to attract, motivate and retain the kind of talent

required in the organization.

Mandatory mediation/interest arbitration was eliminated prior to 2005 collective

bargaining. In the first set of negotiations without this dispute resolution tool, the Society

[1] The C.D.. Howe Institute. “No Free ride:The Cost of Essential Services Designation” Benjamin Dachis 2008.


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initiated a 15-week strike. The strike was primarily in response to Hydro One’s desire to

reduce wages and benefits and increase hours of work for new employees. Hydro One

was requested by the Shareholder to enter into mediation – arbitration to end the strike.

The resulting arbitration award did result in some cost savings for future hires,

highlighted with less costly pension provisions for new Society employees.

5.0 OVERVIEW OF HYDRO ONE NEGOTIATIONS

Collective bargaining is not a precise science. For every gain/concession in collective

bargaining, there is not an exact corresponding gain/concession given. Rather, the aim of

collective bargaining is for the bargainers to strike a balance so both parties feel their

objectives have been satisfied and that overall, both parties can recommend to their

constituents that the deal should be approved. The following tables highlight the

significant changes achieved for PWU and Society negotiations since 2001.

Table 1

PWU Negotiations

Term Changes

April 1, 2001 – March 31, 2002 Modified Staff Reduction clause to allow for easier staff reduction

• Shortened the winter meal period by two months plus • Summer student rates reduced to $12 and $13 per hour. • List of 14 province-wide automatic Purchase Service Agreements • New Hiring Hall classification of General Helper at $16.27 per

hour. • Renewed ability to have Lines staff on 2nd shift • Agreement to allow Career Edge placements (develop skills for

university /College students)


Term Changes

April 1, 2002 – March 31, 2003 • New Temporary Work Headquarters process featuring travel allowances in place of Hydro vehicles, hotels and meals

• Generic Change of Employer clause to facilitate movement of employees from Hydro One to Inergi and future similar situations.

• Retain temporary employees for 15 months (previously 12 months) and 18 months with Chief Steward agreement.

• 50% of Training Instructors can be temporary instead of regular. • Made Linesperson second shift permanently available. • New lower cost Meter Reader B classification •

April 1, 2003 – March 31, 2005 • Ability to invoke streamlined staff reduction process • Can rehire Meter Reader B at lower rate without a 6-month break

in service. • PWU to provide Management with a list of Hiring Hall Meter

Readers for direct call out to work by Management. • Continue temporary work headquarters provisions. • CMS shift work provisions continued at mid-term agreement rates. • On-call established for Helicopter Pilots and Air Engineers. • Joint team to review health and dental costs with the goal of

finding ways to reduce the total cost.

April 1, 2005-March 31, 2008 • Eliminated the PWU annual incentive plan that would have paid up to 6% of base pay per year. • Established a new three-day weekend shift in Lines. • Established a new lower-paid Switching agent classification and midnight shift. • Established full afternoon shift for Fleet Mechanics.

March 31, 2008-March 31, 2011

• Greater flexibility to employ University and College students • Security clearances for new hires • Pre hire assessment tool for apprentices


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Table 2

Society Negotiations

Term Changes

January 1, 2002-December 31, 2002

• Generic Change of Employer clause to facilitate movement of employees from Hydro One to Inergi and future similar situations

• Reduction in temporary travel expenses upon a paid move • Reduction in sick leave benefit • Reduction in benefits • Greater flexibility to extend temporary employees

January 1, 2003- March 31st 2005

• Incentive Pay not renewed • Interest Arbitration not extended • Increase ability to use shift workers

April 1, 2005 – March 31,2008

(arbitrated settlement)

• New pension plan 25% less expensive • Managements Rights Clause

April 1, 2008 –March 31, 2011

(early negotiations)

• Elimination of 1% Performance Pay • Upper end of salary schedules reduced • New lower hiring rates • Jurisdiction, Dependent Contractor, Contracting Out grievances

withdrawn • Contracting Out language suspended to provide greater flexibility

to contract out work • Security Clearances introduced for new hires

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Management Compensation Plan (MCP)

In January 2004, Hydro One introduced revised pension and benefit plans for new MCP

staff hired. These new plans are approximately 25% less costly than the previous plans.

In addition, in 2002 all MCP staff had 5 extra weekly hours added to their base hours of

work.

6.0 COMPENSATION STRATEGY

Hydro One has experienced rapidly increasing transmission and distribution work

programs since 2004. Resourcing of these work programs must occur on the most cost

effective basis possible within a highly competitive labour market.


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Table 3 provides a snapshot of year end compensation costs for Hydro One Networks

(Transmission and Distribution) from 2005 to 2010. The Company believes that the

upward trend in these costs is reasonable in light of the steadily increasing transmission

and distribution work programs since 2005, as well as the negotiated increases in labour

rates.

Table 3

Year End Hydro One Networks Inc Payroll* (M$) ( Tx and DX)

Hydro One Networks Inc. Payroll* (M$) Year Total Wages Base Overtime Incentive Other**

2005 397.9 321.1 50.6 8.4 17.7

2006 459.3 368.0 66.5 4.4 20.5

2007 495.5 414.7 60.9 6.6 13.2

2008 569.0 475.5 60.4 8.5 24.6

2009 589.2 492.4 62.5 8.8 25.5

2010 619.9 518.0 65.8 9.3 26.8 9

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* This payroll reflects compensation costs associated with year-end headcounts for all EPSCA, PWU, Society and MCP

Transmission and Distribution staff. ** “Other” includes travel time, vacation bonus, unused vacation days paid out, standby allowance, shift allowance, vacation pay on

termination. Table 3 does not reflect the revenue requirement for compensation for this Application.

For the period 2008-2010, the total Networks (Transmission and Distribution) work

program is expected to increase by over 20% whereas the regular staff increase is

expected to increase by approximately 6%.

Operating within a competitive labour market, Hydro One has faced, and continues to

face, a number of challenges with respect to the establishment and maintenance of a more

favourable cost structure. Most notably, more than 90% of the workforce is unionized,

and came to Hydro One with pre-existing collective agreements. As noted earlier,

because 70% of the workforce is represented by a single union, the PWU, the


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Corporation would be unable to continue operations in the event of a work stoppage by

that union of any significant duration. Consequently, the focus in collective bargaining

with the PWU has been on increasing productivity and on reducing staff levels relative to

the work program, rather than on seeking compensation concessions.

With respect to collective bargaining with the Society of Energy Professionals of Ontario

(“Society”), Hydro One’s view is that our goal of reducing overall wages, pension and

benefits for future new hires reflects a reasonable balance between the need to attract and

retain new staff while pursuing a more favourable cost structure. This is a difficult

balance to achieve – too much of a reduction in compensation and benefits will impact

our ability to attract the new skills necessary to replenish our workforce.

Following the Ontario Hydro demerger, Hydro One introduced a new MCP, which

included base salary, benefits and variable pay. The MCP is designed around a structure

comprised of 10 broad band levels. Compensation adjustments are made as deemed

necessary to attract, motivate and retain competent staff. The advantage of such a system

is that it reduces the number of pay layers, simplifies administration, and provides

increased opportunity for employees to progress as they gain skills and experience,

without the frequent need to change positions.

Each management position is assigned to a salary band according to the accountabilities,

size and complexity of the job. Base salary within the pay band depends upon individual

expertise relative to the requirements of the job. Base salary is reviewed annually. Hydro

One establishes reference positions using Hay Methodology. All Hydro One MCP jobs

are rated against these reference positions for scope and complexity.

Base salary adjustments for MCP staff are tightly managed and have never been applied

as “across-the-board” economic increases, but rather to reflect improved competency in a


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job. In 2007 and 2008, the Human Resources and Public Policy Committee of the Board

made available 3.5% and 3.8% of base salary for increases. Base salary increases for

2009 and 2010 are projected to be 4.0%.

The variable pay concept is another key component of the management compensation

strategy. Each of the 10 broad base salary bands has a maximum variable pay range

associated with it. These maximums are percentages of the individual’s base salary, and

have been determined through an assessment of compensation practices in the target

market.

The program provides an incentive payment, based on an employee’s performance

against a specific set of annual performance criteria and factors in corporate performance.

The incentive is re-earnable every year, so it is not built into the employee’s ongoing

compensation. In a year where performance is very strong, the incentive will be at the

high end of the range. In years where performance is not as strong, a reduced incentive,

or no incentive pay, will be provided. The re-earnable aspect of the program reflects a

best practice approach since it minimizes the long-term compensation costs and allocates

pay based solely on performance.

It is important from an employee attraction, motivation and retention perspective that the

management bands be competitive with the external market and that internal relativities

be maintained. The compensation strategy for MCP is that Hydro One would target total

cash compensation at the 75th percentile of the target market comparator group, which is

the Hay All Industrial Component. The organizations in this study represent corporations

which are in the electricity sector or related fields and with which we compete for talent.

Hydro One’s best performers are highly marketable, and several management staff have

left the company in recent years. The Hydro One succession plan has facilitated internal


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promotion and a smooth transition in most cases, but our internal replacement capacity is

now significantly diminished in key areas. External recruitment has proved challenging

as our compensation levels and structures have fallen below the market for top people.

7.0 COMPENSATION BENCHMARKING STUDY 5

Hydro One has undertaken an independent benchmarking study on total compensation

and productivity relative to the market in response to the Board’s directive in the EB-

2006-0501 Decision With Reasons. Hydro One issued a Request for Proposal and

ultimately engaged Mercer Canada Limited to conduct the total compensation

benchmarking. Mercer subcontracted Oliver Wyman (a unit of Oliver Wyman Group) to

conduct the productivity benchmarking study. The resulting benchmarking study is

provided in Exhibit A, Tab 16, Schedule 2.

Hydro One conducted four consultation sessions (see Exhibit A, Tab 17, Schedule1) to

seek stakeholder input and buy-in at key steps in the preparation and delivery of the

compensation cost and productivity benchmarking studies. In October of 2007, the first

session was held to gain insight into stakeholder expectations for the benchmarking

studies. The groups reviewed the Board directives with respect to those studies and

provided input on the content for the terms of reference for the study. The second

meeting held in December, allowed Hydro One to gain additional stakeholder input

regarding key metrics and comparator selection criteria. This input was provided to

Mercer and Oliver Wyman as a basis for developing their respective studies. In March

2008, Mercer reviewed their approach to this benchmarking study and subsequently

incorporated the stakeholder feedback into their survey. On September 4, 2008, the

Stakeholders reviewed the results of the compensation and productivity study prepared

by Mercer and Oliver Wyman. A full report of the Stakeholder Consultation process can

be found at Exhibit A, Tab 17, Schedule 1.


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As summarized in Table 4, the results of the compensation benchmarking study show that

Hydro One is currently between 1% below and 21% above the market median for total

compensation for each of three employee groups. On an overall weighted average basis

for the benchmarked positions, Hydro One is approximately 17% above the market

median. Factors that can be attributed to Hydro One’s position in the compensation

market would include legacy collective agreement commitments, a need for competitive

salaries and legacy pension and benefit programs.

Table 4

Transmission and Distribution Compensation Benchmarking

Total Transmission and Distribution Compensation (Current)

The OEB’s decision also directed Hydro One to include a productivity component in the

benchmarking study that would provide empirical evidence that reveals the relative

productivity of its workforce in comparison to other utilities. In developing this study,

Oliver Wyman encountered a number of key challenges. There appears to be no standard

industry wide measures for workforce productivity in the electric transmission and

distribution industry. As well, there is no standard method of collecting and reporting


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productivity measures across Canadian utilities. It was also a challenge to show how

productivity can be measured across the entire workforce. Given the multi functions and

discrete activities within an integrated utility, there is no single metric that is available.

Most of the 24 peer utilities who were contacted several times to participate in the survey

were unwilling and/or unable to gather the detailed productivity survey data which was

requested.

Ultimately, Oliver Wyman simplified its original approach to deal with these challenges.

Hydro One’s productivity for transmission and distribution function and customer service

function were measured along four indicators rather than specific metrics. As

summarized in Table 5, the indicators measured for total transmission and distribution

productivity Hydro One ranked better than the market median (meaning more productive)

with the exception of one indicator which was slightly lower than median. Hydro One

customer service productivity indicators (not shown in Table 5 but discussed in the

report) ranked the best among the peer group.


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Table 5

Transmission and Distribution Productivity Benchmarking

Transmission and Distribution Productivity

As stated by Mercer/ Oliver Wyman in their study report, “examining the mix of

[productivity] indicators leads to the conclusion that Hydro One requires less workforce

compensation to generate various units of output”. Therefore the positive Hydro One

productivity results balance Hydro One’s total compensation being above the market

median. The benchmarking study results provide further support for Hydro One’s

position that its continued productivity accomplishments offset its relative compensation

levels.

8.0 ARNETT PANEL 14

In the EB-2006-0501 decision, the Board directed Hydro One to track any reduction in

Executive salaries during 2007 and 2008. Hydro One has accepted the recommendations

of the Arnett Panel regarding executive compensation. The top 5 executive positions at

Hydro One will have their compensation altered as the incumbents leave in order to


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follow the guidelines recommended by the Arnett Panel. To date, the positions of Chief

Executive Officer and General Counsel have had their salaries reduced.

9.0 SUMMARY

Compensation levels at Hydro One are reasonable and appropriate given the environment

in which we operate. Our staff are the most highly skilled and highly trained employees

in the industry. Our staff performs more complex work than others in our industry.

Hydro One’s demographic challenge requires us to be active in the labour market place

and with world wide competition for these skills, competitive compensation is a

necessity.

In addition, in a heavily unionized environment, there are significant constraints on an

employer’s ability to reduce compensation costs per employee. However, despite these

constraints, the Corporation has made significant gains in the reduction of pension and

benefits costs for MCP staff and pension costs for Society-represented staff. As well,

over time, lower Society wage schedules should reduce overall compensation costs.

Compensation at Hydro One is heavily influenced from the legacy of being part of

Ontario Hydro. However, Hydro One has shown a track record of making progress on

cost reduction and increase flexibility.

Filed: September 30, 2008 EB-2008-0272 Exhibit C1-3-2 Appendix “A” Page 1 of 4

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PENSION COSTS

1.0 PENSION COSTS

Hydro One Networks is a participant in the Hydro One Pension Plan (“the Plan”). The

Plan is a contributory, defined-benefit pension plan whose members comprise

represented employees of the Power Workers Union (“PWU”), the Society of Energy

Professionals (“Society”), MCP employees, pensioners who were employees, and

pensioners who are beneficiaries of employees or pensioners.

The Board has previously allowed cash payments related to pension obligations to be

recorded in rates (RP-1998-0001). As well, in April 2006, the OEB in its Decision with

Reasons, approved full recovery of Distribution pension costs included in OM&A

(RP-2005-0020/EB-2005-0378). Pension costs were similarly amortized for

Transmission pension costs (EB-2006-0501); this treatment was continued in Hydro One

Distribution’s most recent rate application as well (EB-2007-0681).

Pursuant to the Inergi outsourcing agreement Hydro One Networks is also required to

pay, directly to Inergi, a predetermined estimate of Inergi’s annual current service

pension cost in each year for each of the ten years of the outsourcing.

The Hydro One pension cost allocated to Hydro One Networks is based on the ratio of

base pensionable earnings for Hydro One Networks’ staff, as compared to the total base

pensionable earnings for all of Hydro One employees. The method of allocation of the

pension cost and the Inergi annual pension charge is consistent among all shared services

costs, for operating and capital costs, and is consistent with the methodology reviewed

during RP-2005-0020/EB-2005-0378, EB-2006-0501 and EB-2007-0681.


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For the Transmission business, the annual charge to be recovered through rates is

estimated as follows:

Annual cash pension cost (millions) (may not add due to rounding)

2009

Corporate Pension Costs Transmission Distribution Other Total

OM&A $ 28 $ 34 $ 2 $ 64

Capital $ 17 $ 26 $ - $ 43

$ 45 $ 60 $ 2 $ 107

Inergi Annual Pension Charge

OM&A $ 1 $ 4 $ - $ 5

2010

Corporate Pension Costs Transmission Distribution Other Total

OM&A $ 29 $ 36 $ 2 $ 67

Capital $ 17 $ 27 $ - $ 44

$ 46 $ 63 $ 2 $ 111

Inergi Annual Pension Charge

OM&A $ 1 $ 4 $ - $ 5

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2.0 ACTUARIAL CALCULATION

The most recent actuarial valuation for the Hydro One Plan was as at December 31, 2006.

In September 2007, Hydro One filed this actuarial valuation with the Financial Services

Commission of Ontario (FSCO). The valuation showed that the Plan had a deficit of

$216 million, on a going-concern basis. The required contribution for the Hydro One

companies was set at $94 million starting in 2007 (actual contributions were about $95

million), variable based on the level of base pensionable earnings. Of this amount, about

$70 million represented annual current service costs, and the remaining portion

represented special payments over 15 years required toward the going-concern

deficiency, and commuted value top-ups.


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In accordance with applicable regulations, Hydro One makes all required contributions

on a monthly basis.

Hydro One’s next actuarial valuation will be prepared as at December 31, 2009 and will

be filed with FSCO in September 2010. The valuation will depend on investment returns,

changes in benefits, and actuarial assumptions.

The nominal discount rate used for the going-concern valuation in the 2006 actuarial

report was the same as 2003. However, inflation was raised from 2.25% to 2.50%,

consistent with market conditions. This is based on the spread between the yield on long-

term Government of Canada Bonds and Government of Canada Real Return Bonds. This

spread increased by 0.25% between December 31, 2003 and December 31, 2006.

Increases in pensionable earnings assumption has increased to 3.25% per year, plus an

age/service dependent merit factor per year, from 3.00% in 2003. Year’s maximum

pensionable earnings are assumed to increase by 3.50% per year from 3.25% per year in

2003.

The staff growth reflected in the increase in current service cost supports the

requirements of the work program.

During 2007, actual contributions were about $95 million. Actual contribution

requirements in 2009 and 2010 may differ depending on the level of base pension

earnings used to compute the monthly contribution. As well, actual contribution

requirements in 2010 may materially differ from the estimates provided depending on the

results of the next actuarial funding valuation as at December 31, 2009 which will be

filed with FSCO in September 2010. The difference between the estimated and actual

pension costs will be tracked in a variance account (see Exhibit F1, Tab 1, Schedule 2).


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3.0 PENSION PLAN GOVERNANCE AND PERFORMANCE

Hydro One is the Plan sponsor and administers the pension assets and obligations of the

Plan. As of December 31, 2007, the Plan had a reported net asset value of $5,117 million

and about 11,857 members. One-third of the Plan’s members are active. The remaining

Plan members are inactive, either retired or beneficiaries of retirees. The Plan

governance was reviewed during RP-2005-0020/EB-2005-0378.

The Fund has consistently outperformed the benchmark made up of passive market

indices. In the period from June 29, 2001 (the Fund’s inception) to December 31, 2007,

the Fund return was 8.35% and the Fund outperformed its target benchmark return by

0.52%.

In addition, Fund performance has been favourable relative to that of other pension funds.

Specifically, the Fund has a 21st percentile rank since inception (the 1st percentile is the

top performing fund in Canada).

compensation, wages, benefits - hydro one · 2017-02-23 · compensation, wages, benefits 1.0...

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