Pepsi 2007 Annual Report Download - page 76

Future Benefit Payments and Funding
Our estimated future benefi t payments are as follows:
2008 2009 2010 2011 2012 2013-17
Pension $290 $315 $350 $385 $425 $2,755
Retiree medical(a) $95 $100 $105 $110 $115 $640
(a) Expected future benefit payments for our retiree medical plans do not reflect any estimated subsidies expected to be received under the 2003 Medicare Act.
Subsidies are expected to be approximately $10 million for each of the years from 2008 through 2012 and approximately $70 million in total for 2013 through 2017.
These future benefi ts to benefi ciaries
include payments from both funded and
unfunded pension plans.
In 2008, we expect to make pension
contributions of up to $150 million, with
up to $75 million expected to be discre-
tionary. Our cash payments for retiree
medical are estimated to be approximately
$85 million in 2008.
Pension Assets
Our pension plan investment strategy
is reviewed annually and is established
based upon plan liabilities, an evalua-
tion of market conditions, tolerance for
risk, and cash requirements for benefi t
payments. Our investment objective is to
ensure that funds are available to meet
the plans’ benefi t obligations when they
are due. Our overall investment strategy is
to prudently invest plan assets in high-
quality and diversifi ed equity and debt
securities to achieve our long-term return
expectation. As part of our investment
strategy, we employ certain equity strate-
gies which, in addition to investing in U.S.
and international common and preferred
stock, include investing in certain equity-
and debt-based securities used collectively
to generate returns in excess of certain
equity-based indices. Debt-based securi-
ties represent approximately a third of our
equity strategy portfolio as of year-end
2007 and 2006. Our investment policy
also permits the use of derivative instru-
ments to enhance the overall return of the
portfolio. Our expected long-term rate of
return on U.S. plan assets is 7.8%, refl ect-
ing estimated long-term rates of return
of 9.3% from our equity strategies, and
5.8% from our fi xed income strategies.
Our target investment allocation is 60%
for equity strategies and 40% for fi xed
income strategies. Our actual pension
plan asset allocations, consistent with our
investment approach and with how we
view and manage our overall investment
portfolio, for the plan years 2007 and
2006, are as follows:
Actual Allocation
Asset Category 2007 2006
Equity strategies 61% 61%
Fixed income strategies 38% 39%
Other, primarily cash 1% –
Total
100% 100%
The expected return on pension plan
assets is based on our historical experi-
ence, our pension plan investment strat-
egy and our expectations for long-term
rates of return. We use a market-related
valuation method for recognizing invest-
ment gains or losses. For this purpose,
investment gains or losses are the differ-
ence between the expected and actual
return based on the market-related value
of assets. This market-related valuation
method recognizes investment gains or
losses over a fi ve-year period from the
year in which they occur, which has the
effect of reducing year-to-year volatility.
Pension expense in future periods will be
impacted as gains or losses are recognized
in the market-related value of assets over
the fi ve-year period.
Pension assets include 5.5 million shares
of PepsiCo common stock with a market
value of $401 million in 2007, and
5.5 million shares with a market value
of $358 million in 2006. Our investment
policy limits the investment in PepsiCo
stock at the time of investment to 10% of
the fair value of plan assets.
As of December 29, 2007, approximately
3%, or approximately $165 million, of
securities in the investment portfolio of
our U.S. pension plans are subprime mort-
gage holdings. We do not believe that the
ultimate realization of such investments
will result in a material impact to future
pension expense, future contributions or
the funded status of our plans.
Retiree Medical Cost Trend Rates
An average increase of 8.5% in the cost
of covered retiree medical benefi ts is
assumed for 2008. This average increase
is then projected to decline gradually
to 5% in 2014 and thereafter. These
assumed health care cost trend rates have
an impact on the retiree medical plan
expense and liability. However, the cap on
our share of retiree medical costs limits
the impact. A 1-percentage-point change
in the assumed health care trend rate
would have the following effects:
74