Pepsi 2005 Annual Report Download - page 65

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Our pension plans cover full-time employ-
ees in the U.S. and certain international
employees. Benefits are determined based
on either years of service or a combination
of years of service and earnings. U.S.
retirees are also eligible for medical and
life insurance benefits (retiree medical) if
they meet age and service requirements.
Generally, our share of retiree medical
costs is capped at specified dollar
amounts, which vary based upon years of
service, with retirees contributing the
remainder of the costs. We use a
September 30 measurement date and all
plan assets and liabilities are generally
reported as of that date. The cost or
benefit of plan changes that increase or
decrease benefits for prior employee
service (prior service cost) is included in
expense on a straight-line basis over the
average remaining service period of
employees expected to receive benefits.
The Medicare Act was signed into law in
December 2003 and we applied the provi-
sions of the Medicare Act to our plans in
2005 and 2004. The Medicare Act
provides a subsidy for sponsors of retiree
medical plans who offer drug benefits
equivalent to those provided under
Medicare. As a result of the Medicare Act,
our 2005 and 2004 retiree medical costs
were $11 million and $7 million lower,
respectively, and our 2005 and 2004 lia-
bilities were reduced by $136 million and
$80 million, respectively. We expect our
2006 retiree medical costs to be approxi-
mately $18 million lower than they other-
wise would have been as a result of the
Medicare Act.
For additional unaudited information on
our pension and retiree medical plans and
related accounting policies and assump-
tions, see “Our Critical Accounting Policies”
in Management’s Discussion and Analysis.
Pension Retiree Medical
2005 2004 2003 2005 2004 2003 2005 2004 2003
U.S. International
Weighted-average assumptions
Liability discount rate........................................................ 5.7% 6.1% 6.1% 5.1% 6.1% 6.1% 5.7% 6.1% 6.1%
Expense discount rate........................................................ 6.1% 6.1% 6.7% 6.1% 6.1% 6.4% 6.1% 6.1% 6.7%
Expected return on plan assets ......................................... 7.8% 7.8% 8.3% 8.0% 8.0% 8.0% –––
Rate of compensation increases........................................ 4.4% 4.5% 4.5% 4.1% 3.9% 3.8% –––
Components of benefit expense
Service cost....................................................................... $ 213 $ 193 $ 153 $32 $27 $24 $40 $38 $33
Interest cost...................................................................... 296 271 245 55 47 39 78 72 73
Expected return on plan assets ........................................ (344) (325) (305) (69) (65) (54) –––
Amortization of prior service cost/(benefit)....................... 36611–(11) (8) (3)
Amortization of experience loss......................................... 106 81 44 15 9526 19 13
Benefit expense................................................................. 274 226 143 34 19 14 133 121 116
Settlement/curtailment loss ............................................. –4––1––––
Special termination benefits............................................. 21 19 4 –1–24–
Total.................................................................................. $ 295 $ 249 $ 147 $34 $21 $14 $135 $125 $116
Note 7 — Pension, Retiree Medical and Savings Plans