Pepsi 2005 Annual Report Download - page 41

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Our 2006 pension expense is estimated
to be approximately $405 million and
retiree medical expense is estimated to be
approximately $126 million. These esti-
mates incorporate the 2006 assumptions,
as well as the impact of the increased
pension plan assets resulting from our
discretionary contributions of $729 million
in 2005 and the impact of the Medicare
Prescription Drug, Improvement and
Modernization Act of 2003 (Medicare Act)
as discussed in Note 7. Changes in our
2006 assumptions include updates to the
lump sum discount rate for the U.S. plans
and to the mortality tables for certain
international plans. The estimated increase
of $69 million in net experience loss
amortization included in estimated 2006
pension expense primarily reflects the
recognition of lower than expected returns
and past asset losses, which account for
approximately $36 million of the increase,
as well as assumption changes and
demographic experience, which account for
approximately $20 million of the increase.
Pension service costs, measured at a
fixed discount rate but including the effect
of demographic assumption changes, as
well as the effects of gains and losses due
to demographics, are reflected in division
results. The effect of changes in discount
and asset return rates, gains and losses
other than those due to demographics, and
the impact of funding are reflected in cor-
porate unallocated expenses. Approximately
$26 million of the increased pension and
retiree medical expense in 2006 will be
reflected in corporate unallocated expenses.
Based on our current assumptions
which reflect our prior experience, current
plan provisions, and expectations for future
experience, and assuming the Board
approves annual discretionary contributions
of approximately $200 million, we expect
our pension expense to remain relatively
flat in 2007. In 2008, we expect our
pension expense to begin to decline, with
the expense dropping to approximately
$305 million by 2011 as unrecognized
experience losses are amortized. If our
assumptions and our plan provisions for
retiree medical remain unchanged and our
experience mirrors these assumptions, we
expect our annual retiree medical expense
beyond 2006 to approximate $130 million.
Sensitivity of Assumptions
A decrease in the discount rate or in the
expected rate of return assumptions would
increase pension expense. The estimated
impact of a 25 basis point decrease in the
discount rate on 2006 pension expense is
an increase of approximately $39 million.
The estimated impact on 2006 pension
expense of a 25 basis point decrease in
the expected rate of return assumption is
an increase of approximately $16 million.
See Note 7 regarding the sensitivity of our
retiree medical cost assumptions.
Future Funding
We make contributions to pension trusts
maintained to provide plan benefits for
certain pension plans. These contributions
are made in accordance with applicable
tax regulations that provide for current tax
deductions for our contributions, and taxa-
tion to the employee only upon receipt of
plan benefits. Generally, we do not fund
our pension plans when our contributions
would not be currently deductible.
Our pension contributions for 2005
were $803 million, of which $729 million
was discretionary. In 2006, we expect
contributions to be about $250 million
with approximately $200 million expected
to be discretionary. Our cash payments for
retiree medical are estimated to be
$85 million in 2006. As our retiree medical
plans are not subject to regulatory funding
requirements, we fund these plans on
a pay-as-you-go basis. For estimated
future benefit payments, including our
pay-as-you-go payments as well as those
from trusts, see Note 7.
Our 2006 pension expense
is estimated to be
approximately $405 million
and retiree medical expense
is estimated to be
approximately $126 million.
Future Expense
An analysis of the estimated change in pension and retiree medical expense follows:
Pension Retiree Medical
2005 expense $329 $135
Decrease in discount rate 84 6
Increase in experience loss/(gain) amortization 69 (3)
Impact of contributions (63) –
Other, including impact of 2003 Medicare Act (14) (12)
2006 estimated expense $405 $126