Pepsi 2010 Annual Report Download - page 90

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The following table provides the weighted-average assumptions used to determine projected benefit liability and benefit expense for
our pension and retiree medical plans:
Pension Retiree Medical
2010 2009 2008 2010 2009 2008 2010 2009 2008
U.S. International
Weighted-average assumptions
Liability discount rate 5.7% 6.1% 6.2% 5.5% 5.9% 6.3% 5.2% 6.1% 6.2%
Expense discount rate 6.0% 6.2% 6.5% 6.0% 6.3% 5.6% 5.8% 6.2% 6.5%
Expected return on plan assets 7.8% 7.8% 7.8% 7.1% 7.1% 7.2% 7.8%
Liability rate of salary increases 4.1% 4.4% 4.4% 4.1% 4.1% 4.1%
Expense rate of salary increases 4.4% 4.4% 4.6% 4.1% 4.2% 3.9%
The following table provides selected information about plans with liability for service to date and total benefit liability in excess of
planassets:
Pension Retiree Medical
2010 2009 2010 2009 2010 2009
U.S. International
Selected information for plans with liability for service
to date in excess of plan assets
Liability for service to date $ (525) $(2,695) $ (610) $ (342)
Fair value of plan assets $ – $ 2,220 $ 474 $ 309
Selected information for plans with projected
benet liability in excess of plan assets
Benet liability $(5,806) $(6,603) $(1,949) $(1,566) $(1,770) $(1,359)
Fair value of plan assets $ 4,778 $ 5,417 $ 1,638 $ 1,368 $ 190 $ 13
Of the total projected pension benefit liability at year-end 2010, $747million relates to plans that we do not fund because the funding
of such plans does not receive favorable tax treatment.
Future Benefit Payments and Funding
Our estimated future benefit payments are as follows:
2011 2012 2013 2014 2015 2016–20
Pension $480 $500 $520 $560 $595 $3,770
Retiree medical(a) $155 $155 $160 $165 $170 $ 875
(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 $11million for each of the years from 2011 through 2015 and approximately $90million in total for 2016 through 2020.
These future benefits to beneficiaries include payments from
both funded and unfunded pension plans.
In 2011, we expect to make pension contributions of approxi-
mately $160million, with up to approximately $15million
expected to be discretionary. Our net cash payments for retiree
medical are estimated to be approximately $145million in 2011.
Plan Assets
Pension
Our pension plan investment strategy includes the use of actively
managed securities and is reviewed annually based upon plan lia-
bilities, an evaluation of market conditions, tolerance for risk and
cash requirements for benefit payments. Our investment objec-
tive is to ensure that funds are available to meet the plans’ benefit
obligations when they become due. Our overall investment strat-
egy is to prudently invest plan assets in a well-diversifiedportfolio
of equity and high-quality 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%.
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 peri-
odically rebalance our investments to our target allocations. In
an eort to enhance diversification, the pension plan divested its
holdings of PepsiCo stock in the fourth quarter of 2010.
The expected return on pension plan assets is based on our
pension plan investment strategy, our expectations for long-term
rates of return by asset class, taking into account volatilities and
correlation among asset classes, and our historical experience.
We also review current levels of interest rates and inflation to
assess the reasonableness of the long-term rates. We evaluate
our expected return assumptions annually to ensure that they