BP 2009 Annual Report Download - page 163

35. Pensions and other post-retirement benefits
BP Annual Report and Accounts 2009
Notes on financial statements
Financial statements
161
Most group companies have pension plans, the forms and benefits of which vary with conditions and practices in the countries concerned. Pension
benefits may be provided through defined contribution plans (money purchase schemes) or defined benefit plans (final salary and other types of
schemes with committed pension payments). For defined contribution plans, retirement benefits are determined by the value of funds arising from
contributions paid in respect of each employee. For defined benefit plans, retirement benefits are based on such factors as the employees’
pensionable salary and length of service. Defined benefit plans may be externally funded or unfunded. The assets of funded plans are generally held in
separately administered trusts.
In particular, the primary pension arrangement in the UK is a funded final salary pension plan under which retired employees draw the majority
of their benefit as an annuity. During 2009, BP announced that, with effect from 1 April 2010, it will close its UK plan to new joiners other than some of
those joining the North Sea SPU. The plan will remain open to those employees who joined BP on or before 31 March 2010.
In the US, a range of retirement arrangements are provided. These include a funded final salary pension plan for certain heritage employees and a
cash balance arrangement for new hires. Retired US employees typically take their pension benefit in the form of a lump sum payment. US employees
are also eligible to participate in a defined contribution (401k) plan in which employee contributions are matched with company contributions.
The level of contributions to funded defined benefit plans is the amount needed to provide adequate funds to meet pension obligations as they
fall due. During 2009, contributions of $9 million (2008 $6 million and 2007 $524 million) and $795 million (2008 $362 million and 2007 $97 million) were
made to the UK plans and US plans respectively. In addition, contributions of $204 million (2008 $130 million and 2007 $127 million) were made to other
funded defined benefit plans. The aggregate level of contributions in 2010 is expected to be approximately $1,000 million, and includes contributions in all
countries that we expect to be required to make by law or under contractual agreements as well as an allowance for discretionary funding.
Certain group companies, principally in the US, provide post-retirement healthcare and life insurance benefits to their retired employees and
dependants. The entitlement to these benefits is usually based on the employee remaining in service until retirement age and completion of a
minimum period of service. The plans are funded to a limited extent.
The obligation and cost of providing pensions and other post-retirement benefits is assessed annually using the projected unit credit method.
The date of the most recent actuarial review was 31 December 2009. The group’s principal plans are subject to a formal actuarial valuation every three
years in the UK, with valuations being required more frequently in many other countries. The most recent formal actuarial valuation of the UK pension
plans was as at 31 December 2008.
The material financial assumptions used for estimating the benefit obligations of the various plans are set out below. The assumptions are reviewed
by management at the end of each year, and are used to evaluate accrued pension and other post-retirement benefits at 31 December. The same
assumptions are used to determine pension and other post-retirement benefit expense for the following year, that is, the assumptions at 31 December
2009 are used to determine the pension liabilities at that date and the pension expense for 2010.
%
Financial assumptions UK US Other
2009 2008 2007 2009 2008 2007 2009 2008 2007
Discount rate for pension
plan liabilities 5.8 6.3 5.7 5.4 6.3 6.1 5.8 5.7 5.6
Discount rate for other post-
retirement benefit plans n/a n/a n/a 5.8 6.2 6.4 n/a n/a n/a
Rate of increase in salaries 5.3 4.9 5.1 4.2 2.2 4.2 3.8 3.5 3.7
Rate of increase for pensions
in payment 3.4 3.0 3.2 –––1.8 1.7 1.8
Rate of increase in deferred
pensions 3.4 3.0 3.2 –––1.2 1.0 1.2
Inflation 3.4 3.0 3.2 2.4 0.4 2.4 2.3 2.0 2.2
Our discount rate assumptions are based on third-party AA corporate bond indices and for our largest plans in the UK, US and Germany we use yields
that reflect the maturity profile of the expected benefit payments. The inflation rate assumptions for our UK and US plans are based on the difference
between the yields on index-linked and fixed-interest long-term government bonds. In other countries we use either this approach, or the central bank
inflation target, or advice from the local actuary depending on the information that is available to us. The inflation assumptions are used to determine
the rate of increase for pensions in payment and the rate of increase in deferred pensions where there is such an increase.
Our assumptions for the rate of increase in salaries are based on our inflation assumption plus an allowance for expected long-term real salary
growth. These include allowance for promotion-related salary growth, of between 0.3% and 0.4% depending on country. In addition to the financial
assumptions, we regularly review the demographic and mortality assumptions.