Pepsi 2011 Annual Report Download - page 39

attributable to our previously held equity interests in connection
with our acquisitions of PBG and PAS.
Pension and Retiree Medical Plans
Our pension plans cover certain full- time employees in the U.S. and
certain international employees. Benets are determined based on
either years of service or a combination of years of service and earn-
ings. Certain U.S. and Canada retirees are also eligible for medical
and life insurance benets (retiree medical) if they meet age and
service requirements. Generally, our share of retiree medical costs is
capped at specied dollar amounts which vary based upon years of
service, with retirees contributing the remainder of the cost.
As of February 2012, certain U.S. employees earning a benet
under one of our dened benet pension plans will no longer
be eligible for Company matching contributions on their
401(k)contributions.
See Note 7 for information about certain changes to our U.S. pen-
sion and retiree medical plans and changes in connection with our
acquisitions of PBG and PAS.
Our Assumptions
The determination of pension and retiree medical plan obligations
and related expenses requires the use of assumptions to estimate
the amount of benets that employees earn while working, as well
as the present value of those benets. Annual pension and retiree
medical expense amounts are principally based on four compo-
nents: (1) the value of benets earned by employees for working
during the year (service cost), (2) the increase in the liability due to
the passage of time (interest cost), and (3) other gains and losses as
discussed below, reduced by (4) the expected return on plan assets
for our funded plans.
Signicant assumptions used to measure our annual pension and
retiree medical expense include:
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(discount rate);
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and mortality;
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benets are based on earnings; and
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Our assumptions reect our historical experience and manage-
ment’s best judgment regarding future expectations. Due to the
signicant management judgment involved, our assumptions could
have a material impact on the measurement of our pension and
retiree medical benet expenses and obligations.
At each measurement date, the discount rates are based on inter-
est rates for high- quality, long- term corporate debt securities with
maturities comparable to those of our liabilities. Our U.S. discount
rate is determined using the Mercer Pension Discount Yield Curve
(Mercer Yield Curve). The Mercer Yield Curve uses a portfolio of
high- quality bonds rated Aa or higher by Moody’s. The Mercer Yield
Curve includes bonds that closely match the timing and amount of
our expected benet payments.
The expected return on pension plan assets is based on our
pension plan investment strategy, our expectations for long- term
rates of return by asset class, taking into account volatility and
correlation among asset classes and our historical experience. We
also review current levels of interest rates and ination to assess the
reasonableness of the long- term rates. We evaluate our expected
return assumptions annually to ensure that they are reasonable.
Our pension plan investment strategy includes the use of actively
managed securities and is reviewed periodically in conjunction with
plan liabilities, an evaluation of market conditions, tolerance for risk
and cash requirements for benet payments. Our investment objec-
tive is to ensure that funds are available to meet the plans’ benet
obligations when they become due. Our overall investment strategy
is to prudently invest plan assets in a well- diversied portfolio of
equity and high- quality debt securities to achieve our long- term
return expectations. Our investment policy also permits the use of
derivative instruments which are primarily used to reduce risk. Our
expected long- term rate of return on U.S. plan assets is 7.8%. Our
2011 target investment allocation was 40% for U.S. equity, 20% for
international equity and 40% for xed income. For 2012, our target
allocations are as follows: 40% for xed income, 33% for U.S. equity,
22% for international equity and 5% for real estate. The change
to the 2012 target asset allocations was made to increase diversi-
cation. Actual investment allocations may vary from our target
investment allocations due to prevailing market conditions. We
regularly review our actual investment allocations and periodically
rebalance our investments to our target allocations. To calculate
the expected return on pension plan assets, our market- related
value ofassets for xed income is the actual fair value. For all other
asset categories, we use a method that recognizes investment gains
or losses (the dierence between the expected and actual return
based on the market- related value of assets) over a ve- year period.
This has the eect of reducing year- to-year volatility.
The dierence between the actual return on plan assets
and the expected return on plan assets is added to, or subtracted
from, other gains and losses resulting from actual experience dif-
fering from our assumptions and from changes in our assumptions
determined at each measurement date. If this net accumulated
gain or loss exceeds 10% of the greater of the market- related value
of plan assets or plan liabilities, a portion of the net gain or loss is
included in expense for the following year based upon the aver-
age remaining service period of active plan participants, which is
approximately 10 years for pension expense and approximately
8 years for retiree medical expense. The cost or benet of plan
changes that increase or decrease benets for prior employee
service (prior service cost/(credit)) is included in earnings on a
straight- line basis over the average remaining service period of
active plan participants.
The health care trend rate used to determine our retiree medical
plan’s liability and expense is reviewed annually. Our review is
based on our claim experience, information provided by our health
plans and actuaries, and our knowledge of the health care industry.
Management’s Discussion and Analysis
PepsiCo, Inc.  Annual Report
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