BP 2014 Annual Report Download - page 140

22. Pensions and other post-retirement benefits – continued
For information on significant estimates and judgements made in relation to accounting for these plans see Pensions and other post-retirement
benefits within Note 1.
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. This pension plan is governed by a corporate trustee whose board is composed of four member-nominated directors, four company-nominated
directors, including an independent director and an independent chairman nominated by the company. The trustee board is required by law to act in the
best interests of the plan participants and is responsible for setting certain policies, such as investment policies of the plan. The UK plan is closed to
new joiners but remains open to ongoing accrual for current members. New joiners in the UK are eligible for membership of a defined contribution
plan.
In the US, a range of retirement arrangements is provided. Historically this has included a funded final salary pension plan for certain heritage
employees and a cash balance arrangement for new joiners, but with effect from 2015 all employees who are members of the final salary pension plan
accrue benefits only under a cash balance arrangement. Retired US employees typically take their pension benefit in the form of a lump sum payment.
The plan’s assets are overseen by a fiduciary investment committee composed of seven BP employees appointed by the president of BP Corporation
North America Inc. (the appointing officer). The investment committee is required by law to act in the best interests of the plan participants and is
responsible for setting certain policies, such as the investment policies of the plan. US employees are also eligible to participate in a defined
contribution (401k) plan in which employee contributions are matched with company contributions. In the US, group companies also provide post-
retirement healthcare and life insurance benefits to retired employees and their 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.
In the Eurozone, there are defined benefit pension plans in Germany, France, the Netherlands and other countries. In Germany and France, the majority
of the pensions are unfunded, in line with market practice. In Germany, the group’s largest Eurozone plan, employees receive a pension and also have
a choice to supplement their core pension through salary sacrifice. For employees who joined since 2002 the core pension benefit is a career average
plan with retirement benefits based on such factors as employees’ pensionable salary and length of service. The returns on the notional contributions
made by both the company and employees are set out in German tax law. Retired German employees take their pension benefit typically in the form of
an annuity. The German plan is governed by a legal agreement between BP and the works council.
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 2014 the aggregate level of contributions was $1,252 million (2013 $1,272 million and 2012 $1,275 million). The aggregate level of contributions
in 2015 is expected to be approximately $1,250 million, and includes contributions in all countries that we expect to be required to make contributions
by law or under contractual agreements, as well as an allowance for discretionary funding.
For the primary UK plan there is a funding agreement between the group and the trustee. On an annual basis the latest funding position is reviewed
and a schedule of contributions covering the next five years is agreed. The funding agreement can be terminated unilaterally by either party with two
years’ notice. The minimum funding requirement therefore represents seven years of future contributions, which amounted to $4,720 million at 31
December 2014. This amount is included in the group’s committed cash flows relating to pensions and other post-retirement benefit plans as set out in
the table of contractual obligations on page 212. There are no such minimum funding requirements after this seven-year period, and the obligation is
taken into account in the determination of the amount of any pension plan surplus recognized on the balance sheet.
Contributions in the US are determined by legislation and are supplemented by discretionary contributions. All of the contributions made into the US
plan in 2014 were discretionary and no statutory funding requirement is expected in the next 12 months.
There was no minimum funding requirement for the US plan, and no significant minimum funding requirements in other countries at 31 December
2014.
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 2014. 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 and a valuation as at 31 December 2014 is currently under way. A valuation of the US plan is carried out annually.
The material financial assumptions used to estimate 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 the accrued benefit obligation at 31 December and pension expense for the following
year.
%
Financial assumptions used to determine benefit obligation
2014 2013
UK
2012 2014 2013
US
2012 2014 2013
Eurozone
2012
Discount rate for plan liabilities 3.6 4.6 4.4 3.7 4.3 3.3 2.0 3.6 3.5
Rate of increase in salaries 4.5 5.1 4.9 4.0 3.9 4.2 3.4 3.4 3.4
Rate of increase for pensions in payment 3.0 3.3 3.1 –––1.8 1.8 1.8
Rate of increase in deferred pensions 3.0 3.3 3.1 –––0.7 0.7 0.7
Inflation for plan liabilities 3.0 3.3 3.1 1.6 2.1 2.4 2.0 2.0 2.0
Financial assumptions used to determine benefit expense
2014 2013
UK
2012 2014 2013
US
2012 2014 2013
Eurozone
2012
Discount rate for plan service cost 4.8 4.4 4.8 4.6 3.3 4.3 3.9 3.5 4.8
Discount rate for plan other finance expense 4.6 4.4 4.8 4.3 3.3 4.3 3.6 3.5 4.8
Inflation for plan service cost 3.4 3.1 3.2 2.1 2.4 1.9 2.0 2.0 2.0
The discount rate assumptions are based on third-party AA corporate bond indices and for our largest plans in the UK, US and the Eurozone 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. The Eurozone inflation rate assumption is based on the
central bank inflation target. In other countries we use one of these approaches, or advice from the local actuary depending on the information
available. 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.
136 BP Annual Report and Form 20-F 2014