Pepsi 2012 Annual Report Download - page 55

Actual investment allocations may vary from our target
investment allocations due to prevailing market conditions. We
regularly review our actual investment allocations and periodi-
cally rebalance our investments to our target allocations. To
calculate the expected return on pension plan assets, our
market-related value of assets for fixed income is the actual
fair value. For all other asset categories, we use a method that
recognizes investment gains or losses (the difference between
the expected and actual return based on the market-related
value of assets) over a five-year period. This has the effect of
reducing year-to-year volatility.
The difference between the actual return on plan assets and
the expected return on plan assets is added to, or subtracted
from, other gains and losses resulting from actual experi-
ence differing from our assumptions and from changes in our
assumptions determined at each measurement date. If this net
accumulated gain or loss exceeds 10% of the greater of the
market-related value of plan assets or plan liabilities, a portion
of the net gain or loss is included in expense for the follow-
ing year based upon the average remaining service period
of active plan participants, which is approximately 11 years
for pension expense and approximately 8 years for retiree
medical expense. The cost or benefit of plan changes that
increase or decrease benefits for prior employee service (prior
service cost/(credit)) is included in earnings on a straight-line
basis over the average remaining service period of active
plan participants.
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 tech-
nologies and changes in medical carriers.
Weighted-average assumptions for pension and retiree
medical expense are as follows:
2013 2012 2011
Pension
Expense discount rate 4.2% 4.6% 5.6%
Expected rate of return on plan
assets 7.5% 7.6% 7.6%
Expected rate of salary
increases 3.7% 3.8% 4.1%
Retiree medical
Expense discount rate 3.7% 4.4% 5.2%
Expected rate of return on plan
assets 7.8% 7.8% 7.8%
Current health care cost trend
rate 6.6% 6.8% 7.0%
Based on our assumptions, we expect our pension and
retiree medical expenses to increase in 2013 primarily driven by
lower discount rates, partially offset by the impact of the 2012
lump sum payments offered to certain former employees.
Sensitivity of Assumptions
A decrease in the discount rate or in the expected rate of
return assumptions would increase pension expense. A
25-basis-point decrease in the discount rate and expected
rate of return assumptions would increase the 2013 pension
expense as follows:
Assumption Amount
Discount rate $69million
Expected rate of return $33million
See Note7 to our consolidated financial statements for
information about the sensitivity of our retiree medical
cost assumptions.
Funding
We make contributions to pension trusts maintained to
provide plan benefits for certain pension plans. These contri-
butions 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 ben-
efits. Generally, we do not fund our pension plans when our
contributions would not be currently tax deductible. As our
retiree medical plans are not subject to regulatory funding
requirements, we generally fund these plans on a pay-as-you-
go basis, although we periodically review available options to
make additional contributions toward these benefits.
Our pension contributions for 2012 were $1,614million, of
which $1,375million was discretionary. Discretionary 2012
contributions included $405million pertaining to pension lump
sum payments. Our retiree medical contributions for 2012
were $251million, of which $140million was discretionary.
In 2013, we expect to make pension and retiree medi-
cal contributions of approximately $240million, with up to
approximately $17million expected to be discretionary. Our
contributions for retiree medical benefits are estimated to be
approximately $70million in 2013. 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
benefit laws. For estimated future benefit payments, including
our pay-as-you-go payments, as well as those from trusts, see
Note7 to our consolidated financial statements.
Management’s Discussion and Analysis
2012 PEPSICO ANNUAL REPORT 53