BP 2014 Annual Report Download - page 206

6. Pensions – continued
Our discount rate assumption is based on third-party AA corporate bond indices and we use yields that reflect the maturity profile of the expected
benefit payments. The inflation rate assumption is based on the difference between the yields on index-linked and fixed-interest long-term government
bonds. The inflation assumptions are used to determine the rate of increase for pensions in payment and the rate of increase in deferred pensions.
Our assumption for the rate of increase in salaries is based on our inflation assumption plus an allowance for expected long-term real salary growth.
This includes allowance for promotion-related salary growth of 0.7%.
In addition to the financial assumptions, we regularly review the demographic and mortality assumptions. The mortality assumptions reflect best
practice in the UK, and have been chosen with regard to the latest available published tables adjusted where appropriate to reflect the experience of
the group and an extrapolation of past longevity improvements into the future.
Mortality assumptions %
2014 2013 2012
Life expectancy at age 60 for a male currently aged 60 28.3 27.8 27.7
Life expectancy at age 60 for a male currently aged 40 30.9 30.7 30.6
Life expectancy at age 60 for a female currently aged 60 29.4 29.5 29.4
Life expectancy at age 60 for a female currently aged 40 31.8 32.2 32.1
The assets of the principal plan are held in a trust. The primary objective of the trust is to accumulate pools of assets sufficient to meet the obligations
of the plan. The assets of the trusts are invested in a manner consistent with fiduciary obligations and principles that reflect current practices in
portfolio management.
A significant proportion of the assets are held in equities, owing to a higher expected level of return over the long term of such assets 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 fair values of the various categories of asset held by the defined benefit plans at 31 December are set out below.
2014 2013 2012
Expected
long-term
rate of
return
%
Market
value
$ million
Expected
long-term
rate of
return
%
Market
value
$ million
Expected
long-term
rate of
return
%
Market
value
$ million
Listed equity – developed 8.0 16,190 8.0 17,341 8.0 15,659
– emerging 8.0 2,719 8.0 2,290 8.0 1,074
Private equity 8.0 2,983 8.0 2,907 8.0 2,879
Government issued nominal bondsa3.3 642 3.8 549 2.8 544
Index-linked bondsa3.3 892 3.6 787 2.6 491
Corporate bondsa3.3 4,687 4.6 4,427 4.2 3,850
Propertyb6.5 2,403 6.5 2,200 6.5 1,783
Cash 0.9 1,145 0.8 855 0.9 1,000
Other 0.9 112 0.8 160 0.9 66
6.7 31,773 6.9 31,516 6.9 27,346
Present value of plan liabilities 32,357 30,496 29,259
(Deficit) surplus in the plans (584) 1,020 (1,913)
aBonds held are denominated in sterling.
bProperty held is all located in the United Kingdom.
The main pension plan does not invest directly in either securities or property/real estate of the company or of any subsidiary. Some of the pension
plans use derivative financial instruments as part of their asset mix to manage the level of risk.
For the primary UK pension plan there is an agreement with the trustee to reduce the proportion of plan assets held as equities and increase the
proportion held as bonds over time, with a view to better matching of the asset portfolio with the pension liabilities.
The company’s principal plan in the UK does not currently follow a liability driven investment approach, a form of investing designed to match the
movement in pension plan assets with the movement in projected benefit obligations over time.
2014 2013
Analysis of the amount charged to operating profit
Current service costa494 497
Settlement, curtailment and special termination benefits –(22)
Payments to defined contribution plans 30 24
Total operating charge 524 499
Analysis of the amount credited to other finance income
Expected return on pension plan assets 2,147 1,803
Interest on pension plan liabilities (1,375) (1,221)
Other finance income 772 582
Analysis of the amount recognized in the statement of total recognized gains and losses
Actual return less expected return on pension plan assets 547 2,007
Change in assumptions underlying the present value of the plan liabilities (3,139) 60
Experience gains and losses arising on the plan liabilities (42) 41
Actuarial (loss) gain recognized in statement of total recognized gains and losses (2,634) 2,108
a The costs of managing the fund’s investments are offset against the investment return. The costs of administering our pensions plan benefits are included in current service cost.
The parent company financial statements of BP p.l.c. on pages 197-206 do not form part of BP’s Annual Report on Form 20-F as filed with the SEC.
202 BP Annual Report and Form 20-F 2014