BP 2008 Annual Report Download - page 160

Financial statements
BP Annual Report and Accounts 2008
Notes on financial statements
38. 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 that remains open to new employees. Retired
employees draw the majority of their benefit as an annuity.
In the US, a range of retirement arrangements is provided. These include 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 2008, contributions of $6 million (2007 $524 million and 2006 $438 million) and $362 million (2007 $97 million and 2006 $181
million) were made to the UK plans and US plans respectively. In addition, contributions of $130 million (2007 $127 million and 2006 $136 million)
were made to other funded defined benefit plans. The aggregate level of contributions in all countries in 2009 is expected to be approximately
$500 million, and includes contributions 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 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 2008 are used to determine the pension liabilities at that date and the pension expense for 2009.
%
Financial assumptions UK US Other
2008 2007 2006 2008 2007 2006 2008 2007 2006
Discount rate for pension
plan liabilities 6.3 5.7 5.1 6.3 6.1 5.7 5.7 5.6 4.8
Discount rate for post-retirement
benefit plans n/a n/a n/a 6.2 6.4 5.9 n/a n/a n/a
Rate of increase in salaries 4.9 5.1 4.7 2.2 4.2 4.2 3.5 3.7 3.6
Rate of increase for pensions
in payment 3.0 3.2 2.8 –––1.7 1.8 1.8
Rate of increase in deferred
pensions 3.0 3.2 2.8 –––1.0 1.2 1.1
Inflation 3.0 3.2 2.8 0.4 2.4 2.4 2.0 2.2 2.2
Our discount rate assumptions are based on third-party AA corporate bond indices and for our largest schemes in the UK and US we use yields which
reflect the maturity profile of the expected benefit payments. The inflation rate assumptions for our UK and US schemes 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 for deferred pensions where there is such an increase.
Our assumptions for the rate of increase in salaries are based on our inflation assumption plus an allowance for expected long-term real salary
growth. These include allowance for promotion-related salary growth, of between 0.3% and 0.4% depending on country. In addition to the financial
assumptions, we regularly review the demographic and mortality assumptions.
159