BP 2007 Annual Report Download - page 155

BP ANNUAL REPORT AND ACCOUNTS 2007 153
38 Pensions and other post-retirement benefits continued
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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Policy range
Asset category %
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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 as part of their asset mix and to manage 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.
The expected long-term rates of return and market values of the various categories of asset held by the defined benefit plans at 31 December are
set out below. The market values shown include the effects of derivative financial instruments.
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2007 2006 2005
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Expected Expected Expected
long-term Market long-term Market long-term Market
rate of return value rate of return value rate of return value
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% $ million % $ million % $ million
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UK pension plans
Equities 8.0 24,106 7.5 23,631 7.50 18,465
Bonds 4.4 5,279 4.7 3,881 4.25 2,719
Property 6.5 1,259 6.5 1,370 6.50 1,097
Cash 5.6 977 3.8 379 3.50 1,001
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7.3 31,621 7.0 29,261 7.00 23,282
US pension plans
Equities 8.5 6,610 8.5 6,528 8.50 5,961
Bonds 5.0 1,347 5.0 1,371 4.75 1,079
Property 8.0 16 8.0 15 8.00 21
Cash 3.6 72 3.2 41 3.00 256
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8.0 8,045 8.0 7,955 8.00 7,317
US other post-retirement benefit plans
Equities 8.5 17 8.5 19 8.50 20
Bonds 5.0 6 5.0 7 4.75 8
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7.6 23 7.5 26 7.25 28
Other plans
Equities 8.1 1,260 7.6 1,158 7.50 991
Bonds 5.0 1,491 4.6 1,199 4.00 943
Property 5.7 145 4.7 120 5.75 130
Cash 4.2 214 3.0 191 1.50 216
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6.4 3,110 5.8 2,668 5.50 2,280
The assumed rate of investment return and discount rate have a significant effect on the amounts reported. A one-percentage point change in these
assumptions for the group’s plans would have had the following effects:
$ million
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One-percentage point
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Increase Decrease
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Investment return
Effect on pension and other post-retirement benefit expense in 2008 (419) 415
Discount rate
Effect on pension and other post-retirement benefit expense in 2008 (84) 114
Effect on pension and other post-retirement benefit obligation at 31 December 2007 (5,039) 6,459
The assumed US healthcare cost trend rate has a significant effect on the amounts reported. A one-percentage point change in the assumed US
healthcare cost trend rate would have had the following effects:
$ million
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One-percentage point
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Increase Decrease
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Effect on US other post-retirement benefit expense in 2008 32 (26)
Effect on US other post-retirement obligation at 31 December 2007 358 (295)