BP 2011 Annual Report Download - page 236

234 BP Annual Report and Form 20-F 2011
Notes on financial statements
36. Provisions continued
Therefore, for the purposes of calculating a provision for fines and penalties under Section 311 of the Clean Water Act, BP has continued to use an
estimate of 3.2 million barrels of oil discharged to the Gulf of Mexico as its current best estimate, as defined in paragraphs 36-40 of IAS 37 ‘Provisions,
contingent liabilities and contingent assets’, of the amount which may be used in calculating the penalty under Section 311 of the Clean Water Act.
This reflects an estimate of total flow from the well of approximately 4 million barrels, and an estimate of barrels captured by vessels on the surface,
currently estimated at 811,000 barrels. In utilizing this estimate, BP has taken into consideration not only its own analysis of the flow and discharge issue,
but also the analyses and conclusions of other parties, including the US government. The estimate of BP and of other parties as to how much oil was
discharged to the Gulf of Mexico may change, perhaps materially, over time. Changes in estimates as to flow and discharge could affect the amount
actually assessed for Clean Water Act fines and penalties. The year-end provision continued to be based on a per-barrel penalty of $1,100 for the reasons
discussed above, including BP’s continued conclusion that it did not act with gross negligence or engage in wilful misconduct.
The amount and timing of these costs will depend upon what is ultimately determined to be the volume of oil spilled and the per-barrel penalty
rate that is imposed. It is not currently practicable to estimate the timing of expending these costs and the provision has been included within non-current
liabilities on the balance sheet. No other amounts have been provided as at 31 December 2011 in relation to other potential fines and penalties because it
is not possible to measure the obligation reliably. Fines and penalties are not covered by the trust fund.
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 plans) or defined benefit plans (final salary and other types of plans 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 2011, contributions of $429 million (2010 $411 million and 2009 $9 million) and $777 million (2010 $694 million and 2009 $795 million) were
made to the UK plans and US plans respectively. In addition, contributions of $223 million (2010 $188 million and 2009 $204 million) were made to other
funded defined benefit plans. The aggregate level of contributions in 2012 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 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 2011. 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 2011 are used to
determine the pension liabilities at that date and the pension expense for 2012.
%
Financial assumptions UK US Other
2011 2010 2009 2011 2010 2009 2011 2010 2009
Discount rate for pension
plan liabilities 4.8 5.5 5.8 4.3 4.7 5.4 4.7 5.3 5.8
Discount rate for other
post-retirement benefit plans n/a n/a n/a 4.5 5.3 5.8 n/a n/a n/a
Rate of increase in salaries 5.1 5.4 5.3 3.7 4.1 4.2 3.7 3.8 3.8
Rate of increase for pensions
in payment 3.2 3.5 3.4 –– – 1.7 1.8 1.8
Rate of increase in deferred
pensions 3.2 3.5 3.4 –– – 1.2 1.3 1.2
Inflation 3.2 3.5 3.4 1.9 2.3 2.4 2.2 2.3 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 rate 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.