Pepsi 2014 Annual Report Download - page 118

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Future Benefit Payments and Funding
Our estimated future benefit payments are as follows:
2015 2016 2017 2018 2019 2020-24
Pension $ 700 $ 730 $ 775 $ 830 $ 880 $ 5,160
Retiree medical(a) $ 120 $ 125 $ 125 $ 125 $ 125 $ 560
(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 $3 million for each of the years from 2015 through 2019 and approximately
$13 million in total for 2020 through 2024.
These future benefit payments to beneficiaries include payments from both funded and unfunded plans.
In 2015, we expect to make pension and retiree medical contributions of approximately $225 million, with
approximately $55 million for retiree medical benefits.
Plan Assets
Our pension plan investment strategy includes the use of actively managed securities and is reviewed
periodically in conjunction with plan liabilities, an evaluation of market conditions, tolerance for risk and
cash requirements for benefit payments. This strategy is also applicable to funds held for the retiree medical
plans. 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 a well-diversified
portfolio of equity and high-quality debt securities and real estate 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 7.5% for 2015 and 2014. Our target investment
allocations for U.S. plan assets are as follows:
2015 2014
Fixed income 40% 40%
U.S. equity 33% 33%
International equity 22% 22%
Real estate 5% 5%
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 plan assets is based on our plan investment strategy and our expectations for long-
term rates of return by asset class, taking into account volatility 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 are
reasonable. To calculate the expected return on 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.
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