Policy

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 11 years for pension expense and approximately 9 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 the fourth quarter of 2012, the Company offered certain former employees who had vested benefits in our defined benefit pension plans the option of receiving a one-time lump sum payment equal to the present value of the participant’s pension benefit (payable in cash or rolled over into a qualified retirement plan or IRA). In December 2012, we made a discretionary contribution of $405 million to fund substantially all of these payments. The Company recorded a pre-tax non-cash settlement charge of $195 million ($131 million after-tax or $0.08 per share) as a result of this transaction. See additional unaudited information in “Items Affecting Comparability” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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 are as follows:



	Pension												Retiree Medical
	U.S.						International
	2013			2012			2013			2012			2013			2012
Change in projected benefit liability
Liability at beginning of year	$	12,886		$	11,901		$	2,788		$	2,381		$	1,511		$	1,563
Service cost	467			407			111			100			45			50
Interest cost	527			534			118			115			54			65
Plan amendments	22			15			(1		)	—			—			—
Participant contributions	—			—			3			3			—			—
Experience (gain)/loss	(1,522		)	932			(65		)	200			(128		)	(63		)
Benefit payments	(533		)	(278		)	(91		)	(76		)	(97		)	(111		)
Settlement/curtailment	(44		)	(633		)	(3		)	(40		)	—			—
Special termination benefits	22			8			—			1			2			5
Foreign currency adjustment	—			—			(2		)	102			(3		)	2
Other	—			—			1			2			—			—
Liability at end of year	$	11,825		$	12,886		$	2,859		$	2,788		$	1,384		$	1,511

Change in fair value of plan assets
Fair value at beginning of year	$	10,817		$	9,072		$	2,463		$	2,031		$	365		$	190
Actual return on plan assets	1,159			1,282			265			206			76			35
Employer contributions/funding	63			1,368			137			246			62			251
Participant contributions	—			—			3			3			—			—
Benefit payments	(533		)	(278		)	(91		)	(76		)	(97		)	(111		)
Settlement	(44		)	(627		)	(8		)	(33		)	—			—
Foreign currency adjustment	—			—			8			86			—			—
Fair value at end of year	$	11,462		$	10,817		$	2,777		$	2,463		$	406		$	365
Funded status	$	(363	)	$	(2,069	)	$	(82	)	$	(325	)	$	(978	)	$	(1,146	)



	Pension												Retiree Medical
	U.S.						International
	2013			2012			2013			2012			2013			2012
Amounts recognized
Other assets	$	603		$	—		$	74		$	51		$	—		$	—
Other current liabilities	(41		)	(51		)	(1		)	(2		)	(72		)	(71		)
Other liabilities	(925		)	(2,018		)	(155		)	(374		)	(906		)	(1,075		)
Net amount recognized	$	(363	)	$	(2,069	)	$	(82	)	$	(325	)	$	(978	)	$	(1,146	)

Amounts included in accumulated other comprehensive loss (pre-tax)
Net loss/(gain)	$	2,069		$	4,212		$	849		$	1,096		$	(222	)	$	(44	)
Prior service cost/(credit)	125			121			(6		)	(3		)	(69		)	(92		)
Total	$	2,194		$	4,333		$	843		$	1,093		$	(291	)	$	(136	)

Components of the (decrease)/increase in net loss/(gain) included in accumulated other comprehensive loss
Change in discount rate	$	(1,532	)	$	776		$	(166	)	$	188		$	(117	)	$	84
Employee-related assumption changes	24			135			91			(2		)	2			(67		)
Liability-related experience different from assumptions	(14		)	66			10			14			(13		)	(80		)
Actual asset return different from expected return	(336		)	(486		)	(108		)	(60		)	(49		)	(13		)
Amortization and settlement of losses	(285		)	(451		)	(68		)	(64		)	(1		)	—
Other, including foreign currency adjustments	—			(45		)	(6		)	43			—			—
Total	$	(2,143	)	$	(5	)	$	(247	)	$	119		$	(178	)	$	(76	)

Liability at end of year for service to date	$	10,803		$	11,643		$	2,369		$	2,323

The components of benefit expense are as follows:



	Pension																		Retiree Medical
	U.S.									International
	2013			2012			2011			2013			2012			2011			2013			2012			2011
Components of benefit expense
Service cost	$	467		$	407		$	350		$	111		$	100		$	95		$	45		$	50		$	51
Interest cost	527			534			547			118			115			117			54			65			88
Expected return on plan assets	(823		)	(796		)	(704		)	(157		)	(146		)	(136		)	(27		)	(22		)	(14		)
Amortization of prior service cost/(credit)	18			17			14			1			1			2			(23		)	(26		)	(28		)
Amortization of net loss	289			259			145			66			53			40			1			—			12
	478			421			352			139			123			118			50			67			109
Settlement/curtailment (gain)/loss^(a)	(4		)	185			(8		)	7			4			30			—			—			—
Special termination benefits	22			8			71			—			1			1			2			5			1
Total	$	496		$	614		$	415		$	146		$	128		$	149		$	52		$	72		$	110


(a)	U.S. includes pension lump sum settlement charge of $195 million in 2012. This charge is reflected in items affecting comparability (see additional unaudited information in “Items Affecting Comparability” in Management’s Discussion and Analysis of Financial Condition and Results of Operations).

The estimated amounts to be amortized from accumulated other comprehensive loss into expense in 2014 for our pension and retiree medical plans are as follows:



	Pension				Retiree Medical
	U.S.		International
Net loss/(gain)	$	175	$	53	$	(6	)
Prior service cost/(credit)	21		—		(22		)
Total	$	196	$	53	$	(28	)

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
	2013		2012		2011		2013		2012		2011		2013		2012		2011
Weighted-average assumptions
Liability discount rate	5.0	%	4.2	%	4.6	%	4.7	%	4.4	%	4.8	%	4.6	%	3.7	%	4.4	%
Expense discount rate	4.2	%	4.6	%	5.7	%	4.4	%	4.8	%	5.5	%	3.7	%	4.4	%	5.2	%
Expected return on plan assets	7.8	%	7.8	%	7.8	%	6.6	%	6.7	%	6.7	%	7.8	%	7.8	%	7.8	%
Liability rate of salary increases	3.7	%	3.7	%	3.7	%	3.9	%	3.9	%	4.1	%
Expense rate of salary increases	3.7	%	3.7	%	4.1	%	3.9	%	4.1	%	4.1	%

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
	2013			2012			2013			2012			2013			2012
Selected information for plans with liability for service to date in excess of plan assets
Liability for service to date	$	(577	)	$	(11,643	)	$	(310	)	$	(711	)
Fair value of plan assets	$	2		$	10,817		$	259		$	552
Selected information for plans with projected benefit liability in excess of plan assets
Benefit liability	$	(6,555	)	$	(12,886	)	$	(2,291	)	$	(2,542	)	$	(1,384	)	$	(1,511	)
Fair value of plan assets	$	5,589		$	10,817		$	2,135		$	2,166		$	406		$	365

Of the total projected pension benefit liability at year-end 2013, $700 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:



	2014		2015		2016		2017		2018		2019-23
Pension	$	565	$	595	$	640	$	695	$	750	$	4,655
Retiree medical^(a)	$	130	$	130	$	130	$	135	$	135	$	655


(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 $15 million for each of the years from 2014 through 2018 and approximately $85 million in total for 2019 through 2023.

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

In 2014, we expect to make pension and retiree medical contributions of approximately $260 million, with approximately $70 million for retiree medical benefits.

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 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 2014 and 7.8% for 2013. Our target investment allocations are as follows:



	2014		2013
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 pension plan assets is based on our pension 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 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.

Our pension contributions were $200 million, $1,614 million and $239 million for 2013, 2012 and 2011, respectively, of which $23 million, $1,375 million and $61 million, respectively, was discretionary. Discretionary contributions for 2012 included $405 million pertaining to pension lump sum payments.

Retiree Medical

In 2013, 2012 and 2011, we made non-discretionary contributions of $62 million, $111 million and $110 million, respectively, to fund the payment of retiree medical claims. In 2012, we made a discretionary contribution of $140 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. The three levels are defined as follows:

•Level 1: Unadjusted quoted prices in active markets for identical assets.


•	Level 2: Observable inputs other than those included in Level 1. For example, quoted prices for similar assets in active markets or quoted prices for identical assets in inactive markets.

•Level 3: Unobservable inputs reflecting assumptions about the inputs used in pricing the asset.

Plan assets measured at fair value as of fiscal year-end 2013 and 2012 are categorized consistently by level in both years, and are as follows:



	2013								2012
	Total		Level 1		Level 2		Level 3		Total
U.S. plan assets*
Equity securities:
U.S. common stock^(a)	$	732	$	732	$	—	$	—	$	626
U.S. commingled funds^{(b) (c)}	3,334		—		3,334		—		3,106
International common stock^(a)	1,669		1,669		—		—		1,597
International commingled fund^(d)	902		—		902		—		948
Preferred stock^(e)	18		—		18		—		20
Fixed income securities:
Government securities^(e)	1,264		—		1,264		—		1,287
Corporate bonds^{(e) (f)}	2,958		—		2,958		—		2,962
Mortgage-backed securities^(e)	220		—		220		—		110
Other:
Contracts with insurance companies^(g)	6		—		—		6		27
Real estate commingled funds^(h)	552		—		—		552		331
Cash and cash equivalents	154		154		—		—		117
Sub-total U.S. plan assets	11,809		$	2,555	$	8,696	$	558	11,131
Dividends and interest receivable	59								51
Total U.S. plan assets	$	11,868							$	11,182
International plan assets
Equity securities:
U.S. common stock^(a)	$	4	$	4	$	—	$	—	$	—
U.S. commingled funds^(b)	334		—		334		—		278
International common stock^(a)	176		176		—		—		—
International commingled funds^(d)	914		—		914		—		863
Preferred stock^(e)	1		—		1		—		—
Fixed income securities:
Government securities^(e)	207		—		207		—		202
Corporate bonds^(e)	261		—		261		—		230
Fixed income commingled funds⁽ⁱ⁾	650		—		650		—		600
Other:
Contracts with insurance companies^(g)	34		—		—		34		35
Currency commingled fund^(j)	91		—		91		—		64
Real estate commingled fund^(h)	83		—		—		83		60
Cash and cash equivalents	15		15		—		—		125
Sub-total international plan assets	2,770		$	195	$	2,458	$	117	2,457
Dividends and interest receivable	7								6
Total international plan assets	$	2,777							$	2,463


(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.


(c)	Includes one large-cap fund that represents 25% of total U.S. plan assets for both 2013 and 2012.


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


(e)	Based on quoted bid prices for comparable securities in the marketplace and broker/dealer quotes in active markets.


(f)	Corporate bonds of U.S.-based companies represent 21% and 22%, respectively, of total U.S. plan assets for 2013 and 2012.


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


(h)	Based on the appraised value of the investments owned by these funds as determined by independent third parties using inputs that are not observable.


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


(j)	Based on the fair value of the investments owned by this fund that invests primarily in derivatives to hedge currency exposure.


*	2013 and 2012 amounts include $406 million and $365 million, respectively, of retiree medical plan assets that are restricted for purposes of providing health benefits for U.S. retirees and their beneficiaries.

The changes in Level 3 plan assets are as follows:



	Balance, Beginning 2012		Return on Assets Held at Year End		Purchases and Sales, Net			Balance, End of 2012		Return on Assets Held at Year End			Purchases and Sales, Net			Balance, End of 2013
Real estate commingled funds	$	56	$	16	$	319		$	391	$	56		$	188		$	635
Contracts with insurance companies	54		9		(1		)	62		(1		)	(21		)	40
Total	$	110	$	25	$	318		$	453	$	55		$	167		$	675

Retiree Medical Cost Trend Rates

An average increase of 6% in the cost of covered retiree medical benefits is assumed for 2014. 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
2013 service and interest cost components	$	4	$	(3	)
2013 benefit liability	$	39	$	(34	)

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.

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

Certain U.S. salaried employees, who are not eligible to participate in a defined benefit pension plan, are also eligible to receive an employer contribution to the 401(k) savings plan based on age and years of service regardless of employee contribution.

In 2013, 2012 and 2011, our total Company contributions were $122 million, $109 million and $144 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 of Financial Condition and Results of Operations.

PEPSICO INC | 2013 | FY |

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