BP 2012 Annual Report Download - page 241

Items not provided for and uncertainties
BP considers that it is not possible, at this time, to measure reliably any obligation in relation to Natural Resource Damages claims under OPA 90 (other
than the estimated costs of the assessment phase and the costs of early restoration agreements referred to above). It is also not possible to measure
reliably any obligation in relation to business economic loss claims under the PSC settlement not yet received or processed by the DHCSSP, or any
other potential litigation (including through excluded parties from the PSC settlement and any obligation in relation to other potential private or
governmental litigation), fines, or penalties, other than as described above. These items are therefore disclosed as contingent liabilities – see Note 43 for
further information.
The total amounts that will ultimately be paid by BP in relation to all obligations relating to the incident are subject to significant uncertainty and the
ultimate exposure and cost to BP will be dependent on many factors. Furthermore, significant uncertainty exists in relation to the amount of claims that
will become payable by BP, the amount of fines that will ultimately be levied on BP (including any determination of BP’s culpability based on any
findings of negligence, gross negligence or wilful misconduct), the outcome of litigation and arbitration proceedings, and any costs arising from any
longer-term environmental consequences of the oil spill, which will also impact upon the ultimate cost for BP. The amount and timing of any amounts
payable could also be impacted by any further settlements which may or may not occur.
Although the provision recognized is the current best reliable estimate of expenditures required to settle certain present obligations at the end of the
reporting period, there are future expenditures for which it is not possible to measure the obligation reliably described further in Note 43.
37. Pensions and other post-retirement benefits
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. With effect from 1 April 2010, BP closed its UK plan to new joiners other than some of those joining the North Sea business.
The plan remains open to ongoing accrual for those employees who had joined BP on or before 31 March 2010. The majority of new joiners in the UK
have the option to join a defined contribution plan.
In the US, a range of retirement arrangements is provided. This includes 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 2012, contributions of $884 million (2011 $429 million and 2010 $411 million) and $153 million (2011 $777 million and 2010 $694 million)
were made to the UK plans and US plans respectively. In addition, contributions of $238 million (2011 $223 million and 2010 $188 million) were made
to other funded defined benefit plans. The aggregate level of contributions in 2013 is expected to be approximately $1,250 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 2012. 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 2011.
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 2012 are used to determine the pension liabilities at that date and the pension expense for 2013.
%
Financial assumptions
2012 2011
UK
2010 2012 2011
US
2010 2012 2011
Other
2010
Discount rate for pension plan liabilities 4.4 4.8 5.5 3.2 4.3 4.7 3.6 4.7 5.3
Discount rate for other post-retirement benefit plans n/a n/a n/a 3.7 4.5 5.3 n/a n/a n/a
Rate of increase in salaries 4.9 5.1 5.4 4.2 3.7 4.1 3.7 3.7 3.8
Rate of increase for pensions in payment 3.1 3.2 3.5 –––1.7 1.7 1.8
Rate of increase in deferred pensions 3.1 3.2 3.5 –––1.2 1.2 1.3
Inflation 3.1 3.2 3.5 2.4 1.9 2.3 2.2 2.2 2.3
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.
Financial statements 239
BP Annual Report and Form 20-F 2012
Financial statements
36. Provisions continued