Pepsi 2008 Annual Report Download - page 57

55PepsiCo, Inc. 2008 Annual Report
Effective as of the beginning of our 2008 scal year, we
amended our U.S. hourly pension plan to increase the amount of
participant earnings recognized in determining pension benets.
Additional pension plan amendments were also made as of the
beginning of our 2008 scal year to comply with legislative and
regulatory changes.
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. Our review of the trend rate considers factors such
as demographics, plan design, new medical technologies and
changes in medical carriers.
Weighted-average assumptions for pension and retiree medical
expense are as follows:
2009 2008 2007
Pension
Expense discount rate 6.2% 6.3% 5.7%
Expected rate of return on plan assets 7.6% 7.6% 7.7%
Expected rate of salary increases 4.4% 4.4% 4.5%
Retiree medical
Expense discount rate 6.2% 6.4% 5.8%
Current health care cost trend rate 8.0% 8.5% 9.0%
Based on our assumptions, we expect our pension expense to
decrease in 2009, as expected asset returns on 2009 contributions
and costs associated with our Productivity for Growth program
recognized in 2008 are partially offset by an increase in experi-
ence loss amortization. The increase in experience loss amortiza-
tion is due primarily to pension plan asset losses in 2008 and a
slight decline in discount rates.
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 2009
pension expense is an increase of approximately $31 million. The
estimated impact on 2009 pension expense of a 25-basis-point
decrease in the expected rate of return is an increase of approxi-
mately $18 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 benets for certain pension plans. These contributions are
made in accordance with applicable tax regulations that provide
for current tax deductions for our contributions, and taxation to
the employee only upon receipt of plan benets. Generally, we do
not fund our pension plans when our contributions would not be
currently tax deductible.
Our pension contributions for 2008 were $149 million, of
which $23 million was discretionary. In 2009, we will make con-
tributions of $1.1 billion with up to $1 billion being discretionary.
Our cash payments for retiree medical benets are estimated to
be approximately $100 million in 2009. As our retiree medical
plans are not subject to regulatory funding requirements, we fund
these plans on a pay-as-you-go basis. Our pension and retiree
medical contributions are subject to change as a result of many
factors, such as changes in interest rates, deviations between
actual and expected asset returns, and changes in tax or other
benet laws. For estimated future benet payments, including our
pay-as-you-go payments as well as those from trusts, see Note 7.
In 2009, we will make pension contributions of $1.1 billion with
up to $1 billion being discretionary.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 2007, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards
(SFAS) 159, The Fair Value Option for Financial Assets and
Financial Liabilities including an amendment of FASB Statement
No. 115 (SFAS 159), which permits entities to choose to measure
many nancial instruments and certain other items at fair value.
We adopted SFAS 159 as of the beginning of our 2008 scal year
and our adoption did not impact our nancial statements.
In December 2007, the FASB issued SFAS 141 (revised 2007),
Business Combinations (SFAS 141R), to improve, simplify and
converge internationally the accounting for business combina-
tions. SFAS 141R continues the movement toward the greater
use of fair value in nancial reporting and increased transparency
through expanded disclosures. It changes how business acquisi-
tions are accounted for and will impact nancial statements both