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Pension, Retiree Medical And Savings Plans
 12 Months Ended
Dec. 31, 2011
Pension, Retiree Medical And Savings Plans [Abstract]  
Pension, Retiree Medical And Savings Plans

Note 7 — Pension, Retiree Medical and Savings Plans

Our pension plans cover certain 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. Certain 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 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 based upon the average remaining service period of active plan participants, which is approximately 10 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.

In connection with our acquisitions of PBG and PAS, we assumed sponsorship of pension and retiree medical plans that provide benefits to certain U.S. and international employees. Subsequently, during the third quarter of 2010, we merged the pension plan assets of the legacy PBG and PAS U.S. pension plans with those of PepsiCo into one master trust.

During 2010, the Compensation Committee of PepsiCo's Board of Directors approved certain changes to the U.S. pension and retiree medical plans, effective January 1, 2011. Pension plan design changes included implementing a new employer contribution to the 401(k) savings plan for all future salaried new hires of the Company, as salaried new hires are no longer eligible to participate in the defined benefit pension plan, as well as implementing a new defined benefit pension formula for certain hourly new hires of the Company. Pension plan design changes also included implementing a new employer contribution to the 401(k) savings plan for certain legacy PBG and PAS salaried employees (as such employees are also not eligible to participate in the defined benefit pension plan), as well as implementing a new defined benefit pension formula for certain legacy PBG and PAS hourly employees. The retiree medical plan design change included phasing out Company subsidies of retiree medical benefits.

As a result of these changes, we remeasured our pension and retiree medical expenses and liabilities in the third quarter of 2010, which resulted in a one-time pre-tax curtailment gain of $62 million included in retiree medical expenses.

The provisions of both the PPACA and the Health Care and Education Reconciliation Act are reflected in our retiree medical expenses and liabilities and were not material to our financial statements.

 

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

 

     Pension     Retiree Medical  
     U.S.     International    
     2011     2010     2011     2010     2011     2010  

Change in projected benefit liability

            

Liability at beginning of year

    $ 9,851      $ 6,606      $ 2,142      $ 1,709      $ 1,770      $ 1,359   

Acquisitions/(divestitures)

      11        2,161        (63 )      90        —          396   

Service cost

      350        299        95        81        51        54   

Interest cost

      547        506        117        106        88        93   

Plan amendments

      21        28        (16 )      —          3        (132 ) 

Participant contributions

      —          —          3        3        —          —     

Experience loss/(gain)

      1,484        583        224        213        (239 )      95   

Benefit payments

      (414 )      (375 )      (69 )      (69 )      (110 )      (100 ) 

Settlement/curtailment gain

      (20 )      (2 )      (15 )      (3 )      —          —     

Special termination benefits

      71        45        1        3        1        3   

Foreign currency adjustment

      —          —          (41 )      (18 )      (1 )      2   

Other

      —          —          3        27        —          —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Liability at end of year

    $ 11,901      $ 9,851      $ 2,381      $ 2,142      $ 1,563      $ 1,770   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Change in fair value of plan assets

            

Fair value at beginning of year

    $ 8,870      $ 5,420      $ 1,896      $ 1,561      $ 190      $ 13   

Acquisitions/(divestitures)

      11        1,633        (1 )      52        —          —     

Actual return on plan assets

      542        943        79        164        —          7   

Employer contributions/funding

      63        1,249        176        215        110        270   

Participant contributions

      —          —          3        3        —          —     

Benefit payments

      (414 )      (375 )      (69 )      (69 )      (110 )      (100 ) 

Settlement

      —          —          (30 )      (2 )      —          —     

Foreign currency adjustment

      —          —          (23 )      (28 )      —          —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Fair value at end of year

    $ 9,072      $ 8,870      $ 2,031      $ 1,896      $ 190      $ 190   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Funded status

    $ (2,829 )    $ (981 )    $ (350 )    $ (246 )    $ (1,373 )    $ (1,580 ) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Amounts recognized

            

Other assets

    $ —        $ 47      $ 55      $ 66      $ —        $ —     

Other current liabilities

      (91 )      (54 )      (1 )      (10 )      (124 )      (145 ) 

Other liabilities

      (2,738 )      (974 )      (404 )      (302 )      (1,249 )      (1,435 ) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net amount recognized

    $ (2,829 )    $ (981 )    $ (350 )    $ (246 )    $ (1,373 )    $ (1,580 ) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Amounts included in accumulated other comprehensive loss (pre-tax)

            

Net loss

    $ 4,217      $ 2,726      $ 977      $ 767      $ 32      $ 270   

Prior service cost/(credit)

      122        117        (2 )      17        (118 )      (150 ) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total

    $ 4,339      $ 2,843      $ 975      $ 784      $ (86 )    $ 120   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Components of the increase/(decrease) in net loss

            

Change in discount rate

    $ 1,710      $ 556      $ 302      $ 213      $ 115      $ 101   

Employee-related assumption changes

      (140 )      4        (51 )      (4 )      (125 )      8   

Liability-related experience different from assumptions

      (85 )      43        (27 )      5        (210 )      (22 ) 

Actual asset return different from expected return

      162        (300 )      57        (41 )      14        (6 ) 

Amortization of losses

      (147 )      (119 )      (55 )      (24 )      (12 )      (9 ) 

Other, including foreign currency adjustments

      (9 )      (21 )      (16 )      (7 )      (20 )      8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total

    $ 1,491      $ 163      $ 210      $ 142      $ (238 )    $ 80   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Liability at end of year for service to date

    $ 11,205      $ 9,163      $ 1,921      $ 1,743       

The components of benefit expense are as follows:

 

     Pension     Retiree Medical  
     U.S.     International    
     2011     2010     2009     2011     2010     2009     2011     2010     2009  

Components of benefit expense

                  

Service cost

    $ 350      $ 299      $ 238      $ 95      $ 81      $ 54      $ 51      $ 54      $ 44   

Interest cost

      547        506        373        117        106        82        88        93        82   

Expected return on plan assets

      (704 )      (643 )      (462 )      (136 )      (123 )      (105 )      (14 )      (1 )      —     

Amortization of prior service cost/(credit)

      14        12        12        2        2        2        (28 )      (22 )      (17 ) 

Amortization of net loss

      145        119        110        40        24        9        12        9        11   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  
     352        293        271        118        90        42        109        133        120   

Settlement/curtailment (gain)/loss

      (8 )      (2 )      (13 )      30        1        3        —          (62 )      —     

Special termination benefits

      71        45        —          1        3        —          1        3        —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total

    $ 415      $ 336      $ 258      $ 149      $ 94      $ 45      $ 110      $ 74      $ 120   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

The estimated amounts to be amortized from accumulated other comprehensive loss into benefit expense in 2012 for our pension and retiree medical plans are as follows:

 

     Pension      Retiree Medical  
     U.S.      International         

Net loss

    $ 259       $ 52       $ —     

Prior service cost/(credit)

      17         1         (26 ) 
  

 

 

     

 

 

     

 

 

  

Total

    $ 276       $ 53       $ (26 ) 
  

 

 

     

 

 

     

 

 

  

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  
     U.S.     International    
     2011     2010     2009     2011     2010     2009     2011     2010     2009  

Weighted-average assumptions

                  

Liability discount rate

      4.6 %      5.7 %      6.1 %      4.8 %      5.5 %      5.9 %      4.4 %      5.2 %      6.1 % 

Expense discount rate

      5.7 %      6.0 %      6.2 %      5.5 %      6.0 %      6.3 %      5.2 %      5.8 %      6.2 % 

Expected return on plan assets

      7.8 %      7.8 %      7.8 %      6.7 %      7.1 %      7.1 %      7.8 %      7.8 %      —     

Liability rate of salary increases

      3.7 %      4.1 %      4.4 %      4.1 %      4.1 %      4.1 %       

Expense rate of salary increases

      4.1 %      4.4 %      4.4 %      4.1 %      4.1 %      4.2 %       

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  
     U.S.     International    
     2011     2010     2011     2010     2011     2010  

Selected information for plans with liability for service to date in excess of plan assets

            

Liability for service to date

    $ (11,205 )    $ (525 )    $ (471 )    $ (610 )     

Fair value of plan assets

    $ 9,072      $ —        $ 344      $ 474       

Selected information for plans with projected benefit liability in excess of plan assets

            

Benefit liability

    $ (11,901 )    $ (5,806 )    $ (2,191 )    $ (1,949 )    $ (1,563 )    $ (1,770 ) 

Fair value of plan assets

    $ 9,072      $ 4,778      $ 1,786      $ 1,638      $ 190      $ 190   

Of the total projected pension benefit liability at year-end 2011, $787 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:

 

   2012      2013      2014      2015      2016      2017-21  

Pension

    $ 560       $ 560       $ 560       $ 600       $ 645       $ 4,050   

Retiree medical(a)

   $ 135       $ 135       $ 140       $ 145       $ 145       $ 730   

 

(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 $13 million for each of the years from 2012 through 2016 and approximately $100 million in total for 2017 through 2021.

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

In 2012, we expect to make pension and retiree medical contributions of approximately $1.3 billion, with up to approximately $1 billion expected to be discretionary. Our net cash payments for retiree medical are estimated to be approximately $124 million in 2012.

Plan Assets

Pension

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. 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 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 2011 target investment allocation was 40% for U.S. equity, 20% for international equity and 40% for fixed income. For 2012, our target allocations are as follows: 40% for fixed income, 33% for U.S. equity, 22% for international equity and 5% for real estate. The change to the 2012 target asset allocations was made to increase diversification. 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 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 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 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.

 

Retiree Medical

In 2011 and 2010, we made non-discretionary contributions of $110 million and $100 million, respectively, to fund the payment of retiree medical claims. In 2010, we made a discretionary contribution of $170 million to fund future U.S. retiree medical plan benefits. This contribution was invested consistent with the allocation of existing assets in the U.S. pension plan.

Fair Value

The guidance on fair value measurements defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment.

 

Plan assets measured at fair value as of fiscal year-end 2011 and 2010 are categorized consistently by level in both years, and are as follows:

 

     2011      2010  
     Total      Level 1      Level 2      Level 3      Total  

U.S. plan assets*

               

Equity securities:

               

U.S. common stock(a)

   $ 514       $ 514       $ —         $ —         $ 304   

U.S. commingled funds(b)

     3,003         —           3,003         —           3,426   

International common stock(a)

     1,089         1,089         —           —           834   

International commingled fund(c)

     776         —           776         —           992   

Preferred stock(d)

     19         —           19         —           4   

Fixed income securities:

               

Government securities(d)

     1,032         —           1,032         —           950   

Corporate bonds(d) (e)

     2,653         —           2,653         —           2,374   

Mortgage-backed securities(d)

     24         —           24         —           20   

Other:

               

Contracts with insurance companies(f)

     24         —           —           24         28   

Cash and cash equivalents

      78         78         —           —           81   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

Sub-total U.S. plan assets

      9,212       $ 1,681       $ 7,507       $ 24         9,013   
     

 

 

     

 

 

     

 

 

     

Dividends and interest receivable

      50                  47   
  

 

 

              

 

 

  

Total U.S. plan assets

    $ 9,262                $ 9,060   
  

 

 

              

 

 

  

International plan assets

               

Equity securities:

               

U.S. commingled funds(b)

   $ 246       $ —         $ 246       $ —         $ 193   

International commingled funds(c)

     729         —           729         —           779   

Fixed income securities:

               

Government securities(d)

     171         —           171         —           184   

Corporate bonds(d)

     196         —           196         —           152   

Fixed income commingled funds(g)

     530         —           530         —           393   

Other:

               

Contracts with insurance companies(f)

     30         —           —           30         28   

Currency commingled funds(h)

     52         —           52         —           42   

Other commingled fund(i)

     56         —           56         —           —     

Cash and cash equivalents

      16         16         —           —           120   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

Sub-total international plan assets

      2,026       $ 16       $ 1,980       $ 30         1,891   
     

 

 

     

 

 

     

 

 

     

Dividends and interest receivable

      5                  5   
  

 

 

              

 

 

  

Total international plan assets

    $ 2,031                $ 1,896   
  

 

 

              

 

 

  
(a)

Based on quoted market prices in active markets.

 

(b)

Based on the fair value of the investments owned by these funds that track various U.S. large, mid-cap and small company indices. Includes one large-cap fund that represents 30% and 32%, respectively, of total U.S. plan assets for 2011 and 2010.

 

(c)

Based on the fair value of the investments owned by these funds that track various non-U.S. equity indices.

 

(d)

Based on quoted bid prices for comparable securities in the marketplace and broker/dealer quotes that are not observable.

 

(e)

Corporate bonds of U.S.-based companies represent 24% and 22%, respectively, of total U.S. plan assets for 2011 and 2010.

 

(f)

Based on the fair value of the contracts as determined by the insurance companies using inputs that are not observable.

 

(g)

Based on the fair value of the investments owned by these funds that track various government and corporate bond indices.

 

(h)

Based on the fair value of the investments owned by these funds. Includes managed hedge funds that invest primarily in derivatives to reduce currency exposure.

 

(i)

Based on the fair value of the investments owned by this fund that tracks various indices.

 

*

2011 and 2010 amounts include $190 million of retiree medical plan assets that are restricted for purposes of providing health benefits for U.S. retirees and their beneficiaries.

 

Retiree Medical Cost Trend Rates

An average increase of 7% in the cost of covered retiree medical benefits is assumed for 2012. This average increase is then projected to decline gradually to 5% in 2020 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. In addition, as of January 1, 2011, the Company started phasing out Company subsidies of retiree medical benefits. A 1-percentage-point change in the assumed health care trend rate would have the following effects:

 

     1%
Increase		      1%
Decrease		  

2011 service and interest cost components

    $ 4       $ (4 ) 

2011 benefit liability

    $ 39       $ (29 ) 

Savings Plan

Certain 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, and we make Company matching contributions on a portion of eligible pay based on years of service.

In 2010, in connection with our acquisitions of PBG and PAS, we also made Company retirement contributions for certain employees on a portion of eligible pay based on years of service.

As of January 1, 2011, a new employer contribution to the 401(k) savings plan became effective for certain eligible legacy PBG and PAS salaried employees as well as all eligible salaried new hires of PepsiCo who are not eligible to participate in the defined benefit pension plan as a result of plan design changes approved during 2010. In 2011 and 2010, our total Company contributions were $144 million and $135 million, respectively.

As of February 2012, certain U.S. employees earning a benefit under one of our defined benefit pension plans will no longer be eligible for the Company matching contributions on their 401(k) contributions.

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 of Financial Condition and Results of Operations.