Pepsi 2008 Annual Report Download - page 85

83PepsiCo, Inc. 2008 Annual Report
FUTURE BENEFIT PAYMENTS AND FUNDING
Our estimated future benet payments are as follows:
2009 2010 2011 2012 2013 2014 – 18
Pension $350 $335 $370 $400 $425 $2,645
Retiree medical (a) $110 $115 $120 $125 $130 $÷«580
(a) Expectedfuturebenetpaymentsforourretireemedicalplansdonotreectanyestimated
subsidiesexpectedtobereceivedunderthe2003MedicareAct.Subsidiesareexpectedtobe
approximately$10millionforeachoftheyearsfrom2009through2013andapproximately
$70millionintotalfor2014through2018.
These future benets to beneciaries include payments from
both funded and unfunded pension plans.
In 2009, we will make pension contributions of up to $1.1 bil-
lion, with up to $1 billion being discretionary. Our net cash pay-
ments for retiree medical are estimated to be approximately
$100 million in 2009.
PENSION ASSETS
Our pension plan investment strategy includes the use of actively-
managed securities and is reviewed annually based upon plan
liabilities, an evaluation of market conditions, tolerance for risk and
cash requirements for benet payments. Our investment objective
is to ensure that funds are available to meet the plans’ benet
obligations when they become due. Our overall investment strategy
is to prudently invest plan assets in high-quality and diversied
equity and debt securities to achieve our long-term return expecta-
tions. We employ certain equity strategies which, in addition to
investments in U.S. and international common and preferred stock,
include investments in certain equity- and debt-based securities
used collectively to generate returns in excess of certain equity-
based indices. Debt-based securities represent approximately 3%
and 30% of our equity strategy portfolio as of year-end 2008 and
2007, respectively. 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%,
reecting estimated long-term rates of return of 8.9% from our
equity strategies, and 6.3% from our xed income strategies. Our
target investment allocation is 60% for equity strategies and 40%
for xed income strategies. Actual investment allocations may vary
from our target investment allocations due to prevailing market
conditions. We regularly review our actual investment allocations
and periodically rebalance our investments to our target allocations.
Our actual pension plan asset allocations are as follows:
Actual Allocation
AssetCategory 2008 2007
Equity strategies 38% 61%
Fixed income strategies 61% 38%
Other, primarily cash 1% 1%
Total 100% 100%
The expected return on pension plan assets is based on our
pension plan investment strategy, our expectations for long-term
rates of return and our historical experience. We also review cur-
rent levels of interest rates and ination to assess the reasonable-
ness of the long-term rates. To calculate the expected return on
pension plan assets, we use a market-related valuation method
that recognizes investment gains or losses (the difference
between the expected and actual return based on the market-
related value of assets) for securities included in our equity
strategies over a ve-year period. This has the effect of reducing
year-to-year volatility. For all other asset categories, the actual
fair value is used for the market-related value of assets.
Pension assets include 5.5 million shares of PepsiCo common
stock with a market value of $302 million in 2008, and 5.5 mil-
lion shares with a market value of $401 million in 2007. Our
investment 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 8.0% in the cost of covered retiree
medical benets is assumed for 2009. This average increase is
then projected to decline gradually to 5% in 2014 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:
1% Increase 1% Decrease
2008 service and interest cost components $÷6 $÷(5)
2008 benet liability $33 $(29)
SAVINGS PLAN
Our U.S. employees are eligible to participate in 401(k) savings
plans, which are voluntary dened contribution plans. The plans
are designed to help employees accumulate additional savings
for retirement. We make matching contributions on a portion
of eligible pay based on years of service. In 2008 and 2007,
our matching contributions were $70 million and $62 million,
respectively.
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.