Pepsi 2009 Annual Report Download - page 88

76 PepsiCo, Inc. 2009 Annual Report
Notes to Consolidated Financial Statements
FUTURE BENEFIT PAYMENTS AND FUNDING
Our estimated future benefit payments are as follows:
2010 2 011 2012 2013 2014 2015-19
Pension $340 $360 $395 $415 $450 $2,825
Retiree medical(a) $110 $120 $125 $125 $130 $÷«695
(a) Expected future benefit payments for our retiree medical plans do not reflect 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 2010 through 2014 and approximately
$70 million in total for 2015 through 2019.
These future benefits to beneficiaries include payments from
both funded and unfunded pension plans.
In 2010, we will make pension contributions of approximately
$700 million, with up to approximately $600 million expected to
be discretionary. Our net cash payments for retiree medical are
estimated to be approximately $100 million in 2010.
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 benefit payments. Our investment objective
is to ensure that funds are available to meet the plans’ benefit
obligations when they become due. Our overall investment
strategy is to prudently invest plan assets in high-quality and
diversified equity and debt securities to achieve our long-term
return expectations. 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%,
reflecting estimated long-term rates of return of 8.9% from our
equity allocation and 6.3% from our fixed income allocation. Our
target investment allocation is 40% for U.S. equity allocations, 20%
for international equity allocations and 40% for fixed income
allocations. 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.
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 current
levels of interest rates and inflation to assess the reasonableness 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
five-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.
We adopted the new accounting guidance on employer’s
disclosures about postretirement benefit plan assets which requires
that we categorize pension assets into three levels based upon the
assumptions (inputs) used to price the assets. Level 1 provides the
most reliable measure of fair value, whereas Level 3 generally
requires significant management judgment. The three levels are
defined as follows:
• Level 1: Unadjusted quoted prices in active markets for
identical assets.
• Level 2: Observable inputs other than those included in Level 1.
For example, quoted prices for similar assets in active markets
or quoted prices for identical assets in inactive markets.
• Level 3: Unobservable inputs reflecting assumptions about
the inputs used in pricing the asset.
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