Salaries and benefits for Ecopetrol staff are governed by the Colombian Collective Labor (Agreement 01 of 1977), and, by the Colombian Substantive Labor Code. In addition to the legally mandated benefits, employees are entitled to fringe benefits which are subject to the place of work, type of work, length of service, and basic salary. An annual interest of 12% is recognized on accumulated severance amounts for each employee, and the payment of compensation is provided for when special circumstances arise resulting in the non-voluntary termination of the contract, without justified cause, and in periods other than the probationary period.
Ecopetrol belonged to the special pension regime under which pension liabilities are Ecopetrol’s responsibility and not pension fund’s responsibility. However, Law 797 of January 29, 2003 and Legislative Act 001 of 2005 determined that Ecopetrol will no longer belong to the said regime and that from that point on employees would be part of the General Pension Regime. Consequently, pension obligations related to employees pensioned until July 31, 2010 are still Ecopetrol’s responsibility. Employees are entitled to such pension bonus if they worked with Ecopetrol prior to January 29, 2003, but whose labor agreement expired without renewal before that date.
All labor benefits of employees who joined Ecopetrol before 1990 are Ecopetrol’s responsibility, without the involvement of any social security entity or institution. Service cost for the employee and his/her relatives registered with the Group is determined by means of a mortality table, prepared based on facts occurring during the year.
For employees who joined Ecopetrol after the Act 50 of 1990 went in effect, Ecopetrol makes periodic contributions for severance payments, pensions and labor risks to the respective funds.
In 2008, Ecopetrol partially commuted the value corresponding to monthly pension payments from its pension liabilities, transferring such liabilities and their underlying amounts to autonomous pension funds (PAP, for its acronym in Spanish). The funds transferred, and returns on those funds, cannot be redirected nor they can be returned to the Group until all of the pension obligations have been fulfilled. The commuted obligation covers allowances and pension bonds payments; while health and education remains under the labor liability in charge of Ecopetrol.
Employee-benefits are divided into four groups comprised as follows:
| a) | Short-term employee benefits and post-employment defined benefits: |
Benefits to employees in the short term mainly correspond to those which payment will be made in the term of twelve months following the closing of the period in which the employees have rendered their services. These mainly include salaries, severance payments, vacation, bonuses and other benefits.
Post-employment benefits of defined contributions correspond to the periodic payments for severance, pensions and labor risk payments that the Group makes to the respective funds that assume these obligations in their entirety.
The above benefits are recognized as an expense with an associated liability after deducting any already paid amounts.
| b) | Post-employment defined benefit plans: |
In the defined benefits plan, the Group provides the benefits agreed to current and former employees and assumes the actuarial and investment risks.
The following benefits are classified as long-term defined benefit plans recognized in the financial statements according to the calculations of an independent actuary:
Liabilities recognized in the statement of financial position in respect of these benefit plans are the present value of the defined benefit obligation at the date of the statement of financial position, less the fair value of plan assets.
The defined benefit obligation is calculated annually by independent actuaries using the projected credit unit method, which takes into account employees’ years of service and, for pensions, average or final pensionable remuneration. This obligation is discounted at its present value using interest rates of high-quality government bonds denominated in the currency in which the benefits will be paid and of a duration consistent with the plan obligations.
These actuarial calculations involve several assumptions that could differ from the events that will effectively take place in the future. Said assumptions include the determination of the discount rate, future salary increases, mortality rates and future pension increase. Because of the complexity of the calculation, the underlying assumptions and long-term nature of these plans, the obligations for defined benefits are extremely sensitive to changes in assumptions. All key assumptions are revised at the end of the reported period.
In determining the appropriate discount rate, in absence of a broad high quality bond market, Management considers interest rates corresponding to the class B TES bonds issued by the Colombian Government as its best reference, at an appropriate discount rate with maturities extrapolated in line with the term expected for each benefit plan. The mortality rate is based on the particular country’s rate, which latest version is the RV08 mortality table published in resolution 1555 of October 2010. The future salary and pension increases are linked to the country's future inflation rates. Note 22 - Provisions for employee benefits provides further details on key assumptions used.
The amounts recognized in the consolidated statement of profit or loss related to employees defined benefit plans are comprised mainly by service cost and the net financial expense. Service cost includes mainly the increase in present value of the benefit obligation during the period (current service cost) and the amount resulting from a new benefit plan. Plan amendments corresponds to changes in benefits and are usually recognized when all legal and regulatory approvals have been obtained and the effects have been conveyed to the employees involved. The net financial expense is calculated using the net liability for defined benefits as compared with the yield curve of the discount rate at the beginning of each year for each plan. The net defined benefit liability or asset resulting from actuarial profits and losses, the asset ceiling effect and the asset profitability, excluding the value of recognized in the consolidated statement of profit or loss, are recognized in other comprehensive income.
When the plan assets exceed the gross obligation, the recognized asset is limited to the lower of the surplus in the defined benefits plan and the ceiling of assets determined using a discount rate based on Colombian Government bonds.
| (a) | Other long term benefits |
Other long-term benefit is the five-year term bonus which also considered in the actuarial calculation. This benefit is a cash bond that accumulates annually and is paid every five years to employees. The Group recognizes in the consolidated statement of profit or loss the service cost, the net financial cost and the adjustment to the obligation of the defined benefit plan.
Termination benefits are recognized only when a detailed plan exists for such process and there is no possibility to withdraw the offer. The Group recognizes a liability and an expense for termination benefits at the earliest date between the date when the offer of such benefits cannot be withdrawn and the date when the restructuring costs are recognized.
