BP 2011 Annual Report Download - page 291

Financial statements
BP Annual Report and Form 20-F 2011 PC7
Parent company financial statements of BP p.l.c.
The parent company financial statements of BP p.l.c. on pages PC1 – PC14 do not form part of BP’s Annual Report on Form 20-F as filed with the SEC.
6. Pensions
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 joined BP on or before 31 March 2010. The majority of new joiners have the option to join a defined
contribution plan.
The obligation and cost of providing the pension benefits is assessed annually using the projected unit credit method. The date of the most recent
actuarial review was 31 December 2011. The principal plans are subject to a formal actuarial valuation every three years in the UK. The most recent formal
actuarial valuation of the main UK pension plan was as at 31 December 2008.
The material financial assumptions used for estimating the benefit obligations of the plans are set out below. The assumptions used to evaluate
accrued pension at 31 December in any year are used to determine pension 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 cost for 2012.
%
Financial assumptions 2011 2010 2009
Expected long-term rate of return 7.0 7.3 7.4
Discount rate for plan liabilities 4.8 5.5 5.8
Rate of increase in salaries 5.1 5.4 5.3
Rate of increase for pensions in payment 3.2 3.5 3.4
Rate of increase in deferred pensions 3.2 3.5 3.4
Inflation 3.2 3.5 3.4
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 rate assumption is 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 rate assumption plus an allowance for expected long-term real salary
growth. This includes allowance for promotion-related salary growth of 0.4%.
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.
Years
Mortality assumptions 2011 2010 2009
Life expectancy at age 60 for a male currently aged 60 27.6 26.1 26.0
Life expectancy at age 60 for a male currently aged 40 30.5 29.1 29.0
Life expectancy at age 60 for a female currently aged 60 29.3 28.7 28.6
Life expectancy at age 60 for a female currently aged 40 32.0 31.6 31.5
On 31 March 2011, the Burmah Castrol Pension Fund was merged into the BP Pension Fund. As at that date the assets of the Burmah Castrol Pension
Fund were transferred to the BP Pension Fund, and in return the BP Pension Fund will provide the pension benefits which would otherwise have been
provided under the Burmah Castrol Pension Fund. There was no change to the benefits provided to members of either fund as a result of the merger.
In addition, the obligation to provide benefits under an unfunded pension plan operated by Lubricants UK Limited (LUL) was transferred to BP p.l.c.
on 31 March 2011. After this date the benefits previously provided under the LUL plan will be provided through an unfunded pension plan operated by
BP p.l.c.
In each case these transfers were effected at the market value of the pension assets and liabilities as at the date of transfer. As a consequence of
the transfers, the pension plan asset amount of the BP Pension Fund, which is reflected in the accounts of BP p.l.c., was increased by $1,743 million and
the pension liability was increased by $1,671 million.
Movements in the value of plan assets during the year are shown in detail below.
$ million
2011 2010 2009
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
Equities 8.0 17,202 8.0 17,703 8.0 16,148
Bonds 4.4 4,141 5.1 3,128 5.4 2,989
Property 6.5 1,710 6.5 1,412 6.5 1,221
Cash 1.7 534 1.4 369 1.1 595
7.0 23,587 7.3 22,612 7.4 20,953
Present value of plan liabilities 25,675 20,742 19,882
Surplus (deficit) in the plan (2,088) 1,870 1,071