Pepsi 2006 Annual Report Download - page 72

These future benefits to beneficiaries
include payments from both funded
and unfunded pension plans.
In 2007, 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 approxi-
mately $85 million in 2007.
Pension Assets
The expected return on pension plan
assets is based on our historical experi-
ence, our pension plan investment
strategy and our expectations for long-
term rates of return. We use a
market-related value method that
recognizes each year’s asset gain or loss
over a five-year period. Therefore, it
takes five years for the gain or loss from
any one year to be fully included in the
value of pension plan assets that is used
to calculate the expected return. 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 benefit
payments. Our investment objective is
to ensure that funds are available to
meet the plans’ benefit obligations
when they are due. Our investment
strategy is to prudently invest plan
assets in high-quality and diversified
equity and debt securities to achieve
our long-term return expectation. Our
investment policy also permits the use
of derivative instruments to enhance
the overall return of the portfolio. We
use a third-party advisor to assist us in
determining our investment allocation
and modeling our long-term rate of
return assumptions. Our expected long-
term rate of return on U.S. plan assets is
7.8%, reflecting estimated long-term
rates of return of 9.3% from equity
securities and 5.8% from fixed income
securities. Our target allocation and
actual pension plan asset allocations for
the plan years 2006 and 2005 are
as follows:
Pension assets include 5.5 million
shares of PepsiCo common stock with a
market value of $358 million in 2006,
and 5.5 million shares with a market
value of $311 million in 2005. Our invest-
ment policy limits the investment in
PepsiCo stock at the time of investment
to 10% of the fair value of plan assets.
Retiree Medical Cost Trend Rates
An average increase of 9% in the cost
of covered retiree medical benefits is
assumed for 2007. This average increase
is then projected to decline gradually to
5% in 2011 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:
Savings Plan
Our U.S. employees are eligible to partic-
ipate in 401(k) savings plans, which are
voluntary defined contribution plans.
The plans are designed to help employ-
ees accumulate additional savings for
retirement. We make matching contribu-
tions on a portion of eligible pay based
on years of service. In 2006 and 2005, our
matching contributions were $56 million
and $52 million, respectively.
For additional unaudited information
on our pension and retiree medical plans
and related accounting policies and
assumptions, see “Our Critical
Accounting Policies” in Management’s
Discussion and Analysis.
70
Future Benefit Payments and Funding
Our estimated future benefit payments are as follows:
2007 2008 2009 2010 2011 2012-16
Pension $265 $285 $310 $345 $375 $2,490
Retiree medical* $90 $95 $100 $100 $105 $595
*Expected future benefit payments for our retiree medical plans do not reflect any estimated subsidies expected to be received under the Medicare Act.
Subsidies are expected to be approximately $5 million for each of the years from 2007 through 2011 and approximately $40 million for 2012 through 2016.
Actual Allocation
Asset Category Target Allocation 2006 2005
Equity securities 60% 61% 60%
Debt securities 40% 39% 39%
Other, primarily cash – –1%
Total 100% 100% 100%
1% Increase 1% Decrease
2006 service and interest cost components $4 $(3)
2006 benefit liability $42 $(36)
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