Pepsi 2015 Annual Report Download - page 67

Table of Contents
50
Our Assumptions
The determination of pension and retiree medical expenses and obligations requires the use of assumptions
to estimate the amount of benefits that employees earn while working, as well as the present value of those
benefits. Annual pension and retiree medical expense amounts are principally based on four components:
(1) the value of benefits earned by employees for working during the year (service cost), (2) the increase in
the liability due to the passage of time (interest cost), and (3) other gains and losses as discussed in Note 7
to our consolidated financial statements, reduced by (4) the expected return on assets for our funded plans.
Significant assumptions used to measure our annual pension and retiree medical expenses include:
• the interest rate used to determine the present value of liabilities (discount rate);
• certain employee-related demographic factors, such as turnover, retirement age and mortality;
• the expected return on assets in our funded plans;
• for pension expense, the rate of salary increases for plans where benefits are based on earnings; and
• for retiree medical expense, health care cost trend rates.
Our assumptions reflect our historical experience and management’s best judgment regarding future
expectations. Due to the significant management judgment involved, our assumptions could have a material
impact on the measurement of our pension and retiree medical expenses and obligations.
At each measurement date, the discount rates are based on interest rates for high-quality, long-term corporate
debt securities with maturities comparable to those of our liabilities. Our U.S. obligation and pension and
retiree medical expense is based on the discount rates determined using the Mercer Above Mean Curve. This
curve includes bonds that closely match the timing and amount of our expected benefit payments and reflects
the portfolio of investments we would consider to settle our liabilities.
We review our employee demographic assumptions annually and update the assumptions as necessary. During
2014, we revised our mortality assumptions to include the impact of the new set of mortality tables issued
by the Society of Actuaries, adjusted to reflect our experience and future expectations. This resulted in an
increase in the projected benefit obligation of our U.S. pension and retiree medical programs. We also reviewed
and revised other demographic assumptions to reflect recent experience. The net effect of these changes and
certain plan design changes resulted in an increase of approximately $150 million in the projected benefit
obligation at December 27, 2014.
See Note 7 to our consolidated financial statements for information about the expected return on plan assets
and our plan investment strategy.
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 claims 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 technologies and changes in medical carriers.