BP Annual Report and Form 20-F 2011 - Company Reporting

Notes on financial statements36. Provisions continuedTherefore, for the purposes of calculating a provision for fines and penalties under Section 311 of the Clean Water Act, BP has continued to use anestimate 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 wasdischarged to the Gulf of Mexico may change, perhaps materially, over time. Changes in estimates as to flow and discharge could affect the amountactually 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 reasonsdiscussed 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 penaltyrate that is imposed. It is not currently practicable to estimate the timing of expending these costs and the provision has been included within non-currentliabilities on the balance sheet. No other amounts have been provided as at 31 December 2011 in relation to other potential fines and penalties because itis not possible to measure the obligation reliably. Fines and penalties are not covered by the trust fund.37. Pensions and other post-retirement benefitsMost group companies have pension plans, the forms and benefits of which vary with conditions and practices in the countries concerned. Pensionbenefits may be provided through defined contribution plans (money purchase plans) or defined benefit plans (final salary and other types of plans withcommitted pension payments). For defined contribution plans, retirement benefits are determined by the value of funds arising from contributions paid inrespect of each employee. For defined benefit plans, retirement benefits are based on such factors as the employees’ pensionable salary and length ofservice. 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 oftheir 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 UKhave 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 acash balance arrangement for new hires. Retired US employees typically take their pension benefit in the form of a lump sum payment. US employees arealso 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 falldue. During 2011, contributions of $429 million (2010 $411 million and 2009 $9 million) and $777 million (2010 $694 million and 2009 $795 million) weremade to the UK plans and US plans respectively. In addition, contributions of $223 million (2010 $188 million and 2009 $204 million) were made to otherfunded defined benefit plans. The aggregate level of contributions in 2012 is expected to be approximately $1,250 million, and includes contributions in allcountries 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 anddependants. The entitlement to these benefits is usually based on the employee remaining in service until retirement age and completion of a minimumperiod of service.The obligation and cost of providing pensions and other post-retirement benefits is assessed annually using the projected unit credit method. Thedate 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 inthe UK, with valuations being required more frequently in many other countries. The most recent formal actuarial valuation of the UK pension plans was asat 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 bymanagement at the end of each year, and are used to evaluate accrued pension and other post-retirement benefits at 31 December. The same assumptionsare used to determine pension and other post-retirement benefit expense for the following year, that is, the assumptions at 31 December 2011 are used todetermine the pension liabilities at that date and the pension expense for 2012.%Financial assumptions UK US Other2011 2010 2009 2011 2010 2009 2011 2010 2009Discount rate for pensionplan liabilities 4.8 5.5 5.8 4.3 4.7 5.4 4.7 5.3 5.8Discount rate for otherpost-retirement benefit plans n/a n/a n/a 4.5 5.3 5.8 n/a n/a n/aRate of increase in salaries 5.1 5.4 5.3 3.7 4.1 4.2 3.7 3.8 3.8Rate of increase for pensionsin payment 3.2 3.5 3.4 – – – 1.7 1.8 1.8Rate of increase in deferredpensions 3.2 3.5 3.4 – – – 1.2 1.3 1.2Inflation 3.2 3.5 3.4 1.9 2.3 2.4 2.2 2.3 2.3Our 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 yieldsthat reflect the maturity profile of the expected benefit payments. The inflation rate assumptions for our UK and US plans are based on the differencebetween the yields on index-linked and fixed-interest long-term government bonds. In other countries we use either this approach, or the central bankinflation target, or advice from the local actuary depending on the information that is available to us. The inflation rate assumptions are used to determinethe rate of increase for pensions in payment and the rate of increase in deferred pensions where there is such an increase.234 BP Annual Report and Form 20-F 2011