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

Notes on financial statements37. Pensions and other post-retirement benefits continuedOur assumptions for the rate of increase in salaries are based on our inflation rate assumption plus an allowance for expected long-term real salarygrowth. 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. The mortality assumptions reflect bestpractice in the countries in which we provide pensions, and have been chosen with regard to the latest available published tables adjusted where appropriateto reflect the experience of the group and an extrapolation of past longevity improvements into the future. BP’s most substantial pension liabilities arein the UK, the US and Germany where our mortality assumptions are as follows:YearsMortality assumptions UK US Germany2011 2010 2009 2011 2010 2009 2011 2010 2009Life expectancy at age 60 for amale currently aged 60 27.6 26.1 26.0 24.8 24.7 24.6 23.5 23.3 23.2Life expectancy at age 60 for amale currently aged 40 30.5 29.1 29.0 26.3 26.2 26.1 26.3 26.2 26.1Life expectancy at age 60 for afemale currently aged 60 29.3 28.7 28.6 26.4 26.3 26.3 28.0 27.9 27.8Life expectancy at age 60 for afemale currently aged 40 32.0 31.6 31.5 27.3 27.2 27.2 30.7 30.6 30.4Our assumption for future US healthcare cost trend rate for the first year after the reporting date reflects the rate of actual cost increases seen in recentyears. The ultimate trend rate reflects our long-term expectations of the level at which cost inflation will stabilize based on past healthcare cost inflationseen over a longer period of time. The assumed future US healthcare cost trend rate assumptions are as follows:%2011 2010 2009First year’s US healthcare cost trend rate 7.6 7.8 8.0Ultimate US healthcare cost trend rate 5.0 5.0 5.0Year in which ultimate trend rate is reached 2020 2018 2016Pension plan assets are generally held in trusts. The primary objective of the trusts is to accumulate pools of assets sufficient to meet the obligations ofthe various plans. The assets of the trusts are invested in a manner consistent with fiduciary obligations and principles that reflect current practices inportfolio management.A significant proportion of the assets are held in equities, owing to a higher expected level of return over the long term with an acceptable level ofrisk. In order to provide reasonable assurance that no single security or type of security has an unwarranted impact on the total portfolio, the investmentportfolios are highly diversified. The long-term asset allocation policy for the major plans is as follows:UK US OtherAsset category % % %Total equity 73 70 17-63Bonds/cash 20 30 25-75Property/real estate 7 – 0-10Some of the group’s pension plans use derivative financial instruments as part of their asset mix and to manage the level of risk. The group’s main pensionplans do not invest directly in either securities or property/real estate of the company or of any subsidiary.Return on asset assumptions reflect the group’s expectations built up by asset class and by plan. The group’s expectation is derived froma combination of historical returns over the long term and the forecasts of market professionals. Our assumption for return on equities is based on along-term view, and the size of the resulting equity risk premium over government bond yields is reviewed each year for reasonableness. Our assumptionfor return on bonds reflects the portfolio mix of government fixed-interest, index-linked and corporate bonds.Financial statementsBP Annual Report and Form 20-F 2011 235