BP 2006 Annual Report Download - page 155

BP Annual Report and Accounts 2006 153
41 Pensions and other post-retirement benefits continued
The material financial assumptions used for estimating the benefit obligations of the various plans are set out below. The assumptions used to
evaluate accrued pension and other post-retirement benefits at 31 December in any year are used to determine pension and other post-retirement
expense for the following year, that is, the assumptions at 31 December 2006 are used to determine the pension liabilities at that date and the pension
cost for 2007.
%
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Financial assumptions UK USA Other
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2006 2005 2004 2006 2005 2004 2006 2005 2004
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Discount rate for pension plan liabilities 5.1 4.75 5.25 5.7 5.50 5.75 4.8 4.00 5.00
Discount rate for post-retirement benefit plans n/a n/a n/a 5.9 5.50 5.75 n/a n/a n/a
Rate of increase in salaries 4.7 4.25 4.00 4.2 4.25 4.00 3.6 3.25 4.00
Rate of increase for pensions in payment 2.8 2.50 2.50 nil nil nil 1.8 1.75 2.50
Rate of increase in deferred pensions 2.8 2.50 2.50 nil nil nil 1.1 1.00 2.50
Inflation 2.8 2.50 2.50 2.4 2.50 2.50 2.2 2.00 2.50
In addition to the financial assumptions, we regularly review the demographic and mortality assumptions. Mortality assumptions reflect best practicein
the countries in which we provide pensions, and have been chosen with regard to the latest available published tables adjusted where appropriate to
reflect the experience of the group and an extrapolation of past longevity improvements into the future. BP’s most substantial pension liabilities arein
the UK, the US and Germany, where our assumptions are as follows:
Years
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Mortality assumptions UK USA Germany
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2006 2005 2004 2006 2005 2004 2006 2005 2004
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Life expectancy at age 60 for a male currently aged 60 23.9 23.0 23.0 24.2 21.9 21.9 22.2 22.1 20.3
Life expectancy at age 60 for a female currently aged 60 26.8 26.0 26.0 26.0 25.6 25.6 26.9 26.7 25.4
Life expectancy at age 60 for a male currently aged 40 25.0 23.9 23.9 25.8 21.9 21.9 25.2 25.0 20.3
Life expectancy at age 60 for a female currently aged 40 27.8 26.9 26.9 26.9 25.6 25.6 29.6 29.4 25.4
The assumed future US healthcare cost trend rate is as follows: %
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Assumed future US healthcare cost trend rate 2007 2008 2009 2010 2011 2012
2013 and
subsequent
years
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Beneficiaries aged under 65 8.0 7.5 7.0 6.5 6.0 5.5 5.0
Beneficiaries aged over 65 10.0 9.5 8.5 7.5 6.5 5.5 5.0
BP’s post-retirement medical plans in the US provide amongst other things prescription drug coverage for Medicare-eligible retirees. The group’s
obligation for other post-retirement benefits reflects the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the
Act). The provisions of the Act provide for a federal subsidy for plans that provide prescription drug benefits and meet certain qualifications, and
alternatively would allow prescription drug plan sponsors to co-ordinate with the Medicare benefit. BP reflects the impact of the legislation by reducing
its actuarially determined obligation for post-retirement benefits and reducing the net cost for post-retirement benefits. For the year ended 31 December
2006 the reduction in net cost was $40 million (2005 $41 million).
Pension plan assets are generally held in trusts. The primary objective of the trusts is to accumulate pools of assets sufficient to meet the obligation of
the various plans. The assets of the trusts are invested in a manner consistent with fiduciary obligations and principles that reflect current practicesin
portfolio management.
A significant proportion of the assets are held in equities, owing to a higher expected level of return over the long term with an acceptable level of
risk. In order to provide reasonable assurance that no single security or type of security has an unwarranted impact on the total portfolio, the investment
portfolios are highly diversified. The long-term asset allocation policy for the major plans is as follows:
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Asset category Policy range
%
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Total equity 55 – 85
Fixed income/cash 15 – 35
Property/real estate 0–10
Some of the group’s pension funds use derivatives to manage their asset mix and the level of risk. The group’s main pension funds do not directly
invest in either securities or property/real estate of the company or of any subsidiary.
Return on asset assumptions reflect the group’s expectations built up by asset class and by plan. The group’s expectation is derived from a
combination of historical returns over the long term and the forecasts of market professionals.