< Previous | 7 of 14 | Next >

Notes to Consolidated Financial Statements

Note 7. Pension, Retiree Medical and Savings Plans

Our pension plans cover full-time employees in the U.S. and certain international employees. Benefits are determined based on either years of service or a combination of years of service and earnings. U.S. and Canada retirees are also eligible for medical and life insurance benefits (retiree medical) if they meet age and service requirements. Generally, our share of retiree medical costs is capped at specified dollar amounts, which vary based upon years of service, with retirees contributing the remainder of the costs.

Gains and losses resulting from actual experience differing from our assumptions, including the difference between the actual return on plan assets and the expected return on plan assets, and from changes in our assumptions are also 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 following year. 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, which is approximately 10 years for pension expense and approximately 12 years for retiree medical expense.

On December 30, 2006, we adopted SFAS 158. In connection with our adoption, we recognized the funded status of our Plans on our balance sheet as of December 30, 2006 with subsequent changes in the funded status recognized in comprehensive income in the years in which they occur. In accordance with SFAS 158, amounts prior to the year of adoption have not been adjusted. SFAS 158 also required that, no later than 2008, our assumptions used to measure our annual pension and retiree medical expense be determined as of the balance sheet date, and all plan assets and liabilities be reported as of that date. Accordingly, as of the beginning of our 2008 fiscal year, we changed the measurement date for our annual pension and retiree medical expense and all plan assets and liabilities from September 30 to our year-end balance sheet date. As a result of this change in measurement date, we recorded an after-tax $39 million decrease to 2008 opening shareholders’ equity, as follows:

                 
 
Pension
 
Retiree
Medical
 
Total
 
Retained earnings
$
(63
)
$
(20
)
$
(83
)
Accumulated other comprehensive loss
 
12
   
32
   
44
 
Total
$
(51
)
$
12
 
$
(39
)

Selected financial information for our pension and retiree medical plans is as follows:

                                   
   
Pension
   
Retiree Medical
 
   
2008
   
2007
   
2008
   
2007
   
2008
   
2007
 
   
U.S.
 
International
             
Change in projected benefit liability
                                   
Liability at beginning of year
$
6,048
 
$
5,947
 
$
1,595
 
$
1,511
 
$
1,354
 
$
1,370
 
SFAS 158 measurement date change
 
(199
)
 
   
113
   
   
(37
)
 
 
Service cost
 
244
   
244
   
61
   
59
   
45
   
48
 
Interest cost
 
371
   
338
   
88
   
81
   
82
   
77
 
Plan amendments
 
(20
)
 
147
   
2
   
4
   
(47
)
 
 
Participant contributions
 
   
   
17
   
14
   
   
 
Experience loss/(gain)
 
28
   
(309
)
 
(165
)
 
(155
)
 
58
   
(80
)
Benefit payments
 
(277
)
 
(319
)
 
(51
)
 
(46
)
 
(70
)
 
(77
)
Settlement/curtailment loss
 
(9
)
 
   
(15
)
 
   
(2
)
 
 
Special termination benefits
 
31
   
   
2
   
   
3
   
 
Foreign currency adjustment
 
   
   
(376
)
 
96
   
(10
)
 
9
 
Other
 
   
   
(1
)
 
31
   
(6
)
 
7
 
Liability at end of year
$
6,217
 
$
6,048
 
$
1,270
 
$
1,595
 
$
1,370
 
$
1,354
 
Change in fair value of plan assets
                                   
Fair value at beginning of year
$
5,782
 
$
5,378
 
$
1,595
 
$
1,330
 
$
 
$
 
SFAS 158 measurement date change
 
(136
)
 
   
97
   
   
   
 
Actual return on plan assets
 
(1,434
)
 
654
   
(241
)
 
122
   
   
 
Employer contributions/funding
 
48
   
69
   
101
   
58
   
70
   
77
 
Participant contributions
 
   
   
17
   
14
   
   
 
Benefit payments
 
(277
)
 
(319
)
 
(51
)
 
(46
)
 
(70
)
 
(77
)
Settlement/curtailment loss
 
(9
)
 
   
(11
)
 
   
   
 
Foreign currency adjustment
 
   
   
(341
)
 
91
   
   
 
Other
 
   
   
(1
)
 
26
   
   
 
Fair value at end of year
$
3,974
 
$
5,782
 
$
1,165
 
$
1,595
 
$
 
$
 
Reconciliation of funded status
                                   
Funded status
$
(2,243
)
$
(266
)
$
(105
)
$
 
$
(1,370
)
$
(1,354
)
Adjustment for fourth quarter contributions
 
   
15
   
   
107
   
   
19
 
Adjustment for fourth quarter special termination benefits
 
   
(5
)
 
   
   
   
 
Net amount recognized
$
(2,243
)
$
(256
)
$
(105
)
$
107
 
$
(1,370
)
$
(1,335
)
Amounts recognized
                                   
Other assets
$
 
$
440
 
$
28
 
$
187
 
$
 
$
 
Other current liabilities
 
(60
)
 
(24
)
 
(1
)
 
(3
)
 
(102
)
 
(88
)
Other liabilities
 
(2,183
)
 
(672
)
 
(132
)
 
(77
)
 
(1,268
)
 
(1,247
)
Net amount recognized
$
(2,243
)
$
(256
)
$
(105
)
$
107
 
$
(1,370
)
$
(1,335
)
Amounts included in accumulated other comprehensive loss/(credit) (pre-tax)
                                   
Net loss
$
2,826
 
$
1,136
 
$
421
 
$
287
 
$
266
 
$
276
 
Prior service cost/(credit)
 
112
   
156
   
20
   
28
   
(119
)
 
(88
)
Total
$
2,938
 
$
1,292
 
$
441
 
$
315
 
$
147
 
$
188
 
Components of the increase/(decrease) in net loss
                                   
SFAS 158 measurement date change
$
(130
)
$
 
$
105
 
$
 
$
(53
)
$
 
Change in discount rate
 
247
   
(292
)
 
(219
)
 
(224
)
 
36
   
(50
)
Employee-related assumption changes
 
(194
)
 
   
52
   
61
   
6
   
(9
)
Liability-related experience different from assumptions
 
(25
)
 
(17
)
 
(4
)
 
7
   
10
   
(21
)
Actual asset return different from expected return
 
1,850
   
(255
)
 
354
   
(25
)
 
   
 
Amortization of losses
 
(58
)
 
(136
)
 
(19
)
 
(30
)
 
(8
)
 
(18
)
Other, including foreign currency adjustments and 2003 Medicare Act
 
   
   
(135
)
 
23
   
(1
)
 
10
 
Total
$
1,690
 
$
(700
)
$
134
 
$
(188
)
$
(10
)
$
(88
)
Liability at end of year for service to date
$
5,413
 
$
5,026
 
$
1,013
 
$
1,324
             

Components of benefit expense are as follows:

                                                     
   
Pension
   
Retiree Medical
 
 
2008
 
2007
 
2006
 
2008
 
2007
 
2006
 
2008
 
2007
 
2006
 
   
U.S.
   
International
                   
Components of benefit expense
                                                     
Service cost
$
244
 
$
244
 
$
245
 
$
61
 
$
59
 
$
52
 
$
45
 
$
48
 
$
46
 
Interest cost
 
371
   
338
   
319
   
88
   
81
   
68
   
82
   
77
   
72
 
Expected return on plan assets
 
(416
)
 
(399
)
 
(391
)
 
(112
)
 
(97
)
 
(81
)
 
   
   
 
Amortization of prior service cost/(credit)
 
19
   
5
   
3
   
3
   
3
   
2
   
(13
)
 
(13
)
 
(13
)
Amortization of net loss
 
55
   
136
   
164
   
19
   
30
   
29
   
7
   
18
   
21
 
   
273
   
324
   
340
   
59
   
76
   
70
   
121
   
130
   
126
 
Settlement/curtailment loss
 
3
   
   
3
   
3
   
   
   
   
   
 
Special termination benefits
 
31
   
5
   
4
   
2
   
   
   
3
   
   
1
 
Total
$
307
 
$
329
 
$
347
 
$
64
 
$
76
 
$
70
 
$
124
 
$
130
 
$
127
 

The estimated amounts to be amortized from accumulated other comprehensive loss into benefit expense in 2009 for our pension and retiree medical plans are as follows:

                 
   
Pension
 
Retiree Medical
 
 
U.S.
 
International
       
Net loss
$
98
 
$
10
 
$
11
 
Prior service cost/(credit)
 
11
   
2
   
(17
)
Total
$
109
 
$
12
 
$
(6
)

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
 
 
2008
 
2007
 
2006
 
2008
 
2007
 
2006
 
2008
 
2007
 
2006
 
   
U.S.
   
International
                   
Weighted average assumptions
                                                     
Liability discount rate
 
6.2
%
 
6.2
%
 
5.8
%
 
6.3
%
 
5.8
%
 
5.2
%
 
6.2
%
 
6.1
%
 
5.8
%
Expense discount rate
 
6.5
%
 
5.8
%
 
5.7
%
 
5.6
%
 
5.2
%
 
5.1
%
 
6.5
%
 
5.8
%
 
5.7
%
Expected return on plan assets
 
7.8
%
 
7.8
%
 
7.8
%
 
7.2
%
 
7.3
%
 
7.3
%
                 
Rate of salary increases
 
4.6
%
 
4.7
%
 
4.5
%
 
3.9
%
 
3.9
%
 
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
 
   
2008
   
2007
   
2008
   
2007
   
2008
   
2007
 
   
U.S.
 
International
             
Selected information for plans with liability for service to date in excess of plan assets
                                   
Liability for service to date
$
(5,411
)
$
(364
)
$
(49
)
$
(72
)
           
Fair value of plan assets
$
3,971
 
$
 
$
30
 
$
13
             
Selected information for plans with benefit liability in excess of plan assets
                                   
Benefit liability
$
(6,217
)
$
(707
)
$
(1,049
)
$
(384
)
$
(1,370
)
$
(1,354
)
Fair value of plan assets
$
3,974
 
$
 
$
916
 
$
278
             

Of the total projected pension benefit liability at year-end 2008, $587 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:

                                   
 
2009
 
2010
 
2011
 
2012
 
2013
 
2014–18
 
Pension
$
350
 
$
335
 
$
370
 
$
400
 
$
425
 
$
2,645
 
Retiree medical(a)
$
110
 
$
115
 
$
120
 
$
125
 
$
130
 
$
580
 
(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 2009 through 2013 and approximately $70 million in total for 2014 through 2018.
 

These future benefits to beneficiaries include payments from both funded and unfunded pension plans.

In 2009, we will make pension contributions of up to $1.1 billion, with up to $1 billion being discretionary. Our net cash payments for retiree medical are estimated to be approximately $100 million in 2009.

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. We employ certain equity strategies which, in addition to investments in U.S. and international common and preferred stock, include investments in certain equity- and debt-based securities used collectively to generate returns in excess of certain equity-based indices. Debt-based securities represent approximately 3% and 30% of our equity strategy portfolio as of year-end 2008 and 2007, respectively. 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 strategies, and 6.3% from our fixed income strategies. Our target investment allocation is 60% for equity strategies and 40% for fixed income strategies. 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. Our actual pension plan asset allocations are as follows:

           
   
Actual Allocation
 
Asset Category
 
2008
   
2007
 
Equity strategies
 
38
%
 
61
%
Fixed income strategies
 
61
%
 
38
%
Other, primarily cash
 
1
%
 
1
%
Total
 
100
%
 
100
%

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.

Pension assets include 5.5 million shares of PepsiCo common stock with a market value of $302 million in 2008, and 5.5 million shares with a market value of $401 million in 2007. Our investment policy limits the investment in PepsiCo stock at the time of investment to 10% of the fair value of plan assets.

Retiree Medical Cost Trend Rates

An average increase of 8.0% in the cost of covered retiree medical benefits is assumed for 2009. This average increase is then projected to decline gradually to 5% in 2014 and thereafter. These assumed health care cost trend rates have an impact on the retiree medical plan expense and liability. However, the cap on our share of retiree medical costs limits the impact. A 1-percentage-point change in the assumed health care trend rate would have the following effects:

           
 
1% Increase
 
1% Decrease
 
2008 service and interest cost components
$
6
 
$
(5
)
2008 benefit liability
$
33
 
$
(29
)

Savings Plan

Our U.S. employees are eligible to participate in 401(k) savings plans, which are voluntary defined contribution plans. The plans are designed to help employees accumulate additional savings for retirement. We make matching contributions on a portion of eligible pay based on years of service. In 2008 and 2007, our matching contributions were $70 million and $62 million, respectively.

For additional unaudited information on our pension and retiree medical plans and related accounting policies and assumptions, see “Our Critical Accounting Policies” in Management’s Discussion and Analysis.