Pepsi 2012 Annual Report Download - page 93

Plan Assets
Pension
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 con-
ditions, tolerance for risk and cash requirements for benefit
payments. Our investment objective is to ensure that funds
are available to meet the plans’ benefit obligations when they
become due. Our overall investment strategy is to prudently
invest plan assets in a well-diversified 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 target investment allocations are as follows:
2013 2012
Fixed income 40%40%
U.S. equity 33%33%
International equity 22%22%
Real estate 5% 5%
Actual investment allocations may vary from our target
investment allocations due to prevailing market conditions. We
regularly review our actual investment allocations and periodi-
cally rebalance our investments to our target allocations.
The expected return on pension plan assets is based on our
pension plan investment strategy and our expectations for
long-term rates of return by asset class, taking into account
volatility and correlation among asset classes and our histori-
cal experience. We also review current levels of interest rates
and inflation to assess the reasonableness of the long-term
rates. We evaluate our expected return assumptions annually
to ensure that they are reasonable. To calculate the expected
return on pension plan assets, our market-related value
ofassets for fixed income is the actual fair value. For all other
asset categories, we use a method that recognizes invest-
ment gains or losses (the difference between the expected
and actual return based on the market-related value of assets)
over a five-year period. This has the effect of reducing year-
to-year volatility.
Our pension contributions for 2012 were $1,614million,
of which $1,375million was discretionary. Discretionary con-
tributions included $405 million pertaining to pension lump
sum payments.
Retiree Medical
In 2012 and 2011, we made non-discretionary contributions
of $111million and $110million, respectively, to fund the
payment of retiree medical claims. In 2012, we made a dis-
cretionary contribution of $140million to fund future U.S.
retiree medical plan benefits. This contribution was invested
consistently with the allocation of existing assets in the U.S.
pension plan.
Fair Value
The guidance on fair value measurements defines fair value,
establishes a framework for measuring fair value and expands
disclosures about fair value measurements. The fair value
framework requires the categorization of assets and liabilities
into three levels based upon the assumptions (inputs) used to
price the assets. Level 1 provides the most reliable measure
of fair value, whereas Level 3 generally requires significant
management judgment.
2012 PEPSICO ANNUAL REPORT 91
Notes to Consolidated Financial Statements