BP 2015 Annual Report Download - page 206

6. Pensions – continued
Financial assumptions used to determine benefit obligation %
2015 2014 2013
Discount rate for pension plan liabilities 3.9 3.6 4.6
Rate of increase in salaries 4.4 4.5 5.1
Rate of increase for pensions in payment 3.0 3.0 3.3
Rate of increase in deferred pensions 3.0 3.0 3.3
Inflation for pension plan liabilities 3.0 3.0 3.3
Financial assumptions used to determine benefit expense %
2015 2014 2013
Discount rate for pension plan service costs 3.9 4.8 4.4
Discount rate for pension plan other finance expense 3.6 4.6 4.4
Inflation for pension plan service costs 3.1 3.4 3.1
The 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 assumption is used to determine the rate of increase for pensions in payment and the rate of increase in deferred pensions.
The 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 an allowance for promotion-related salary growth.
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 to reflect the experience of the plans and an
extrapolation of past longevity improvements into the future. For the main pension plan the mortality assumptions are as follows:
Mortality assumptions Years
2015 2014 2013
Life expectancy at age 60 for a male currently aged 60 28.5 28.3 27.8
Life expectancy at age 60 for a male currently aged 40 31.0 30.9 30.7
Life expectancy at age 60 for a female currently aged 60 29.5 29.4 29.5
Life expectancy at age 60 for a female currently aged 40 31.9 31.8 32.2
The assets of the primary 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.
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 the asset portfolio with the pension liabilities. During 2015, the plan switched 8%
from equities to bonds.
In 2015, BP’s primary plan in the UK adopted a more formal liability driven investment (LDI) approach for part of the portfolio, a form of investing
designed to match the movement in pension plan assets with the impact of interest rate changes and inflation assumption changes on the projected
benefit obligation.
The company’s current asset allocation policy for the main plan is as follows:
Asset category %
Total equity (including private equity) 62
Bonds/cash (including LDI) 31
Property/real estate 7
The amounts invested under the LDI programme as at 31 December 2015 were $329 million of government issued nominal bonds and $6,421 million
of index-linked bonds. This is partly funded by short-term sale and repurchase agreements, proceeds from which are shown separately in the table
below.
In addition, the primary UK plan entered into interest rate swaps in the year to offset the long-term fixed interest rate exposure for $2,651 million of the
corporate bond portfolio. The $17 million fair value of the swaps as at 31 December 2015 is included in other assets in the table below.
The primary plan does not invest directly in either securities or property / real estate of the company or of any subsidiary.
The fair values of the various categories of assets held by the defined benefit plans at 31 December are presented in the table below, including the
effects of derivative financial instruments. Movements in the fair value of plan assets during the year are shown in detail in the table on page 204.
The parent company financial statements of BP p.l.c. on pages 196-213 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 2015