Writing Assignment: The Coca-Cola Company versus PepsiCo, Inc.

Read the Comparative Analysis Case in Chapter 20: The Coca-Cola Company versus PepsiCo, Inc. Prepare a four to six (4-6) page paper in APA style format in response to the case. Students will respond to the following: 1. Compare the pension plans of Coca-Cola and PepsiCo, including type of plan and funded status at 2007 year-end. 2. Calculate the relevant rates that were used by Coca-Cola and PepsiCo in computing their pension amounts. 3. Determine which company you would rather invest in if you were a potential shareholder. Justify your answer. 4. Determine which company you would rather work for if you were a potential employee. Justify your answer.

Competitive Duopolies
Coca-Cola and Pepsi are two big agile and really ferocious competitors in a duopoly,y that control almost the entire market for soft drinks products

given to a person (usually after retirement). There are different types of pensions.
They are both highly differentiated products with different pension plans. A pension is a steady income

Coca-Cola, which last year reported $31.9 billion in operating revenueup from $28.9 billion in 2007is the third major employer to adopt a cash-balance plan for new and current employees since 2006, when Congress passed the Pension Protection Act.Under the cash
balance plan design, employees will receive annual age-weighted credits equal to a percentage of pay. Those credits will start at 3% of pay and increase with age. Employees cash balance plan accounts also will be credited with interest, though Coca-Cola hasnt yet decided on the interestrate formula it will use. The plan will be offered to most U.S. salaried and hourly employees hired as of Jan. 1, 2010. Current employees now in Coca-Colas traditional $1.5 billion final average pay plan will earn future benefits in the new plan starting Jan. 1, 2010. Coca-Colas move to a cash balance plan comes at a time when many major employers are phasing out their defined benefit plans and offering only defined contribution plans. But Coca-Cola executives rejected such an approach. Offering a secure and risk-free benefit to employees is very important to us, said Sue Fleming, director of global benefits at Atlanta-based Coca-Cola. The appeal of a cash balance plan for an increasingly mobile workforce is that benefits, which are based on career average pay, accrue faster than they do in traditional plans, in which employees have to work many years before accruing significant benefits, Ms. Fleming said. That broad pension funding reform law included provisions that let employers set up new cash balance plans without fear of facing litigation. Several dozen employers who had established cash balance plans years ago were later sued for

age discrimination. The PPA took off the handcuffs of employers that wanted to use the plans, Ms. Fleming said.

PepsiCo is one of the few major employers still to offer new joiners a final salary pension. This high quality scheme helps you plan for a secure retirement for you and your family.

http://www.eric.org/forms/uploadFiles/301900000002.filename.Heaslip_Testimony.pdf VERY IMPORTANT LINK BOUT Pepsi Co

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Pension and Retiree Medical 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 cost. The difference between the actual return on plan assets and the expected return on plan assets is added to, or subtracted from, other gains and losses resulting from actual experience differing from our assumptions and from changes in our assumptions 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. Effective as of the beginning of our 2008 fiscal year, we amended our U.S. hourly pension plan to increase the amount of participant earnings recognized in determining pension benefits. Additional pension plan amendments were also made as of the beginning of our 2008 fiscal year to comply with legislative and regulatory changes. The health care trend rate used to determine our retiree medical plans liability and expense is reviewed annually. Our review is based on our claim 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 Based on our assumptions, we expect our pension expense to decrease in 2009, as expected asset returns on 2009 contributions and costs associated with our Productivity for Growth

program recognized in 2008 are partially offset by an increase in experience loss amortization. The increase in experience loss amortization is due primarily to pension
If I was a was a potential investor I would rather invest in Cola Cola is because Coca-Cola Co. is using its Dublin-based captive insurer to fund benefits earned by pension plan participants in the United Kingdom and Ireland. Coca-Cola executives say the program will generate significant operational efficiencies and potential financial advantages. Instead of dealing with a diverse group of pension plan trustees and investment managers for each plan in different countries, Coca-Cola will be able to consolidate asset management through the captive. In addition, if investment results are strong, the surplus generated would accrue to the captive and could be used by Coca-Cola rather than having to remain in the plan. . For plan participants, the arrangement that utilizes annuities assures that their benefits are insured and fully immunized against market volatility, said Stacy Apter, senior global benefits consultant with Atlanta-based Coca-Cola. We have responsibility for managing investments and, in return, plan members' benefits are guaranteed This is part of a larger picture to use captives as a central locus to manage the investment and risks of employee benefit obligations as is financially and legally appropriate, said Mitchell Cole, a director in the Stamford, Conn., office of Towers Watson & Co., which is Coca-Cola's consultant on the captive pension and retiree health care funding projects. Ultimately, Ms. Solomon said, it is not difficult to generate interest and buy-in when financial advantages or other efficiencies can be demonstrated.

. Our pension plan investment strategy includes the use of activelymanaged 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 longterm 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. 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.

If I was a potential employee I would hold no more than 10 percent of my overall retirement savings in their company's stock, in order to keep a diversified portfolio. Indeed, the Department of Labor limits to 10 percent the amount of company stock a company can hold in a traditional pension plan, although there are no rules governing 401(k)s. "Your current income is already tied to your company. You don't want your retirement assets wiped out, too," says Damon Silvers, associate general counsel for the AFL-CIO labor group, which has been encouraging its members away from investing in their companies' stock. If I was a potential employers, using stock to match worker contributions to 401(k)s offers several benefits, including lower costs. Companies often use shares that they already own in their corporate treasury, which allows them to

take the same tax deduction as they would if they paid cash, while preserving their cash for other purposes. Handing out stock also is seen as giving employees an economic tie to the company's success. Companies now must weigh those benefits against the cost of potential lawsuits, most of which allege breach of fiduciary duty related to losses suffered in the 401(k) when the company stock dropped in value. Coca-Cola Co., which uses stock to match employee contributions to its 401(k), is being sued by workers claiming the company should have taken steps to eliminate or reduce the amount of company stock in the plan. Coke's 401(k) plan held assets of $1.33 billion at the end of 2005, with 57 percent of that money in Coke stock, a company spokeswoman says. Coke also has a traditional pension plan with $1.9 billion in assets at the end of last year, of which only 3.4 percent of the money was in Coke stock, she says. Coke declined to comment on the lawsuit or on the company's retirement plan other than to say that the plan's features are "continually under review."

Under the cash-balance plan design, employees will receive annual age-weighted credits equal to a percentage of pay. Those credits will start at 3 percent of pay and increase with age. Employees cashbalance plan accounts also will be credited with interest, though Coca-Cola hasnt yet decided on the interest-rate formula it will use. Current employees now in Coca-Colas traditional $1.5 billion final average pay plan will earn future benefits in the new plan starting January 1, 2010. Offering a secure and risk-free benefit to employees is very important to us, said Sue Fleming, director of global benefits at Atlanta-based Coca-Cola. The appeal of a cash-balance plan for an increasingly mobile workforce is that benefits, which are based on career average pay, accrue faster than they do in traditional plans, in which employees have to work many years before accruing significant benefits, Fleming said. That broad pension funding reform law included provisions that let employers set up new cash-balance plans without fear of facing litigation. Several dozen employers who had established cashbalance plans years ago were later sued for age discrimination.

Our Assumptions
The determination of pension and retiree medical plan obligations and related expenses requires the use of assumptions to estimate the amount of the 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) increase in the liability due to the passage of time (interest cost), and (3) other gains and losses as discussed below, reduced by (4) expected return on plan assets for our funded plans. Significant assumptions used to measure our annual pension and retiree medical expense include: the interest rate used to determine the present value of liabilities (discount rate); certain employee-related factors, such as turnover, retirement age and mortality; for pension expense, the expected return on assets in our funded plans and 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 experience and managements 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 benefit expenses and obligations. 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 plan asset losses in 2008 and a slight decline in discount rates.

Sensitivity of Assumptions
A decrease in the discount rate or in the expected rate of return assumptions would increase pension expense. The estimated impact of a 25-basis-point decrease in the discount rate on 2009 pension expense is an increase of approximately $31 million. The estimated impact on 2009 pension expense of a 25-basis-point decrease in the expected rate of return is an increase of approximately $18 million. See Note 7 regarding the sensitivity of our retiree medical cost assumptions.

Future Funding
We make contributions to pension trusts maintained to provide plan benefits for certain pension plans. These contributions are made in accordance with applicable tax regulations that provide for current tax deductions for our contributions, and taxation to the employee only upon receipt of plan benefits. Generally, we do not fund our pension plans when our contributions would not be currently tax deductible.

In 2009, we will make pension contributions of $1.1 billion with up to $1 billion being discretionary. Our pension contributions for 2008 were $149 million, of which $23 million was discretionary. In 2009, we will make contributions of $1.1 billion with up to $1 billion being discretionary. Our cash payments for retiree medical benefits are estimated to be approximately $100 million in 2009. As our retiree medical plans are not subject to regulatory funding requirements, we fund these plans on a pay-as-you-go basis. Our pension and retiree medical contributions are subject to change as a result of many factors, such as changes in interest rates, deviations between actual and expected asset returns, and changes in tax or other benefit laws. For estimated future benefit payments, including our pay-as-you-go payments as well as those from trusts, see Note 7.

Managements Discussion & Analysis

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Pension and Retiree Medical 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 cost.

Our Assumptions
The determination of pension and retiree medical plan obligations and related expenses requires the use of assumptions to estimate the amount of the 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) increase in the liability due to the passage of time (interest cost), and (3) other gains and losses as discussed below, reduced by (4) expected return on plan assets for our funded plans. Significant assumptions used to measure our annual pension and retiree medical expense include: the interest rate used to determine the present value of liabilities (discount rate); certain employee-related factors, such as turnover, retirement age and mortality; for pension expense, the expected return on assets in our funded plans and 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 experience and managements 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 benefit expenses and obligations.

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. Our pension plan investment strategy includes the use of activelymanaged 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 longterm 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. 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. The difference between the actual return on plan assets and the expected return on plan assets is added to, or subtracted from, other gains and losses resulting from actual experience differing from our assumptions and from changes in our assumptions 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. Effective as of the beginning of our 2008 fiscal year, we amended our U.S. hourly pension plan to increase the amount of participant earnings recognized in determining pension benefits. Additional pension plan amendments were also made as of the beginning of our 2008 fiscal year to comply with legislative and regulatory changes. The health care trend rate used to determine our retiree medical plans liability and expense is reviewed annually. Our review is based on our claim 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. Weighted-average assumptions for pension and retiree medical expense are as follows:

200 9 Pension Expense discount rate Expected rate of return on plan assets Expected rate of salary increases Retiree medical Expense discount rate Current health care cost trend rate 6.2 % 7.6 % 4.4 % 6.2 % 8.0 %

200 8 6.3 % 7.6 % 4.4 % 6.4 % 8.5 %

200 7 5.7 % 7.7 % 4.5 % 5.8 % 9.0 %

Based on our assumptions, we expect our pension expense to decrease in 2009, as expected asset returns on 2009 contributions and costs associated with our Productivity for Growth program recognized in 2008 are partially offset by an increase in experience loss amortization. The increase in experience loss amortization is due primarily to pension plan asset losses in 2008 and a slight decline in discount rates.

Defined benefit plans By law, Internal Revenue Code Section 414, a defined benefit plan is any pension plan Traditional defined benefit plan designs (because of their typically flat accrual rate and the decreasing time for interest discounting as people get closer to retirement age) tend to exhibit a J-shaped accrual pattern of benefits, where the present value of benefits grows quite slowly early in an employees' career and accelerates significantly in mid-career. Defined benefit pensions tend to be less portable than defined contribution plans even if the plan alllows a lump sum cash benefit at termination due to the difficulty of valuing the transfer value. On the other hand, defined benefit plans typically pay their benefits as an annuity, so retirees do not bear the investment risk of low returns on contributions or of outliving their retirement income. The open ended nature of this risk to the employer is the reason given by many employers for switching from defined benefit to defined contribution plans. Because of the J-shaped accrual rate, the cost of a defined benefit plan is very low for a young workforce, but extremely high for an older workforce. This age bias, the difficulty of portability and open ended risk, makes defined benefit plans better suited to large employers with less mobile workforces, such as the public sector. Defined benefit plans are also criticised as being paternalistic as they require employers or plan trustees to make decisions about the type of benefits and family structures and lifestyles of their employees. The United States Social Security system is similar to a defined benefit pension arrangement, albeit one that is constructed differently than a pension offered by a private employer. The "cost" of a defined benefit plan is not easily calculated, and requires an actuary or

actuarial software. However, even with the best of tools, the cost of a defined benefit plan will always be an estimate based on economic and financial assumptions. These assumptions include the average retirement age and life span of the employees, the returns earned by the pension plan's investments and any additional taxes or levies, such as those required by the Pension Benefit Guaranty Corporation in the U.S. So, for this arrangement, the benefit is known but the contribution is unknown even when calculated by a professional.

Defined contribution plans In the United States, the legal definition of a defined contribution plan is a plan providing for an individual account for each participant, and for benefits based solely on the amount contributed to the account, plus or minus income, gains, expenses and losses allocated to the account (see 26 U.S.C. 414(i)). Plan contributions are paid into an individual account for each member. The contributions are invested, for example in the stock market, and the returns on the investment (which may be positive or negative) are credited to the individual's account. On retirement, the member's account is used to provide retirement benefits, often through the purchase of an annuity which provides a regular income. Defined contribution plans have become more widespread all over the world in recent years, and are now the dominant form of plan in the private sector in many countries. For example, the number of defined benefit plans in the US has been steadily declining, as more and more employers see the large pension contributions as a large expense that they can avoid by disbanding the plan and instead offering a defined contribution plan. Examples of defined contribution plans in the United States include Individual Retirement Accounts (IRAs) and 401(k) plans. In such plans, the employee is responsible, to one degree or another, for selecting the types of investments toward which the funds in the retirement plan are allocated. This may range from choosing one of a small number of predetermined mutual funds to selecting individual stocks or other securities. Most selfdirected retirement plans are characterized by certain tax advantages, and some provide for a portion of the employee's contributions to be matched by the employer. In exchange, the funds in such plans may not be withdrawn by the investor prior to reaching a certain age--typically the year the employee reaches 59.5 years old--(with a small number of exceptions) without incurring a substantial penalty. Money contributed can either be from employee salary deferral or from employer contributions or matching. Defined contribution plans are subject to IRS limits on how much can be contributed, known as the section 415 limit. The total deferral amount including the employee and employer contribution is the lesser of $40,000 or 100% of compensation. The employee only amount is $15,000 for 2006 with a $5,000 catch up. These numbers continue to be increased each year and are indexed to compensate for the effects of inflation. The portability of defined contribution pensions is legally no different from the portability of defined benefit plans. However, because of the cost of administration and ease of determining the plan sponsor's liability for defined contribution plans (you don't need to pay a actuary to calculate the lump sum equivalent under Section 417(e) that you do for defined benefit plans) in practice, defined contribution plans have become generally portable. In a defined contribution plan, investment risk and investment rewards are assumed by each individual/employee/retiree and not by the sponsor/employer. In addition, participants do not typically purchase annuities with their savings upon retirement, and

bear the risk of outliving their assets. The "cost" of a defined contribution plan is readily calculated, but the benefit from a defined contribution plan depends upon the account balance at the time an employee is looking to use the assets. So, for this arrangement, the contribution is known but the benefit is unknown (until calculated). Despite the fact that the participant in a defined contribution plan typically has control over investment decisions, the plan sponsor retains a significant degree of fiduciary responsibility over investment of plan assets, including the selection of investment options and administrative providers.

Hybrid and cash balance plans Hybrid plan designs combine the features of defined benefit and defined contribution plan designs. In general, they are usually treated as defined benefit plans for tax, accounting and regulatory purposes. As with defined benefit plans, investment risk in hybrid designs is largely borne by the plan sponsor. As with defined contribution designs, plan benefits are expressed in the terms of a notional account balance, and are usually paid as cash balances upon termination of employment. These features make them more portable than traditional defined benefit plans and perhaps more attractive to a more highly mobile workforce. A typical hybrid design is the Cash Balance Plan, where the employee's notional account balance grows by some defined rate of interest and annual employer contribution.

Financing There are various ways in which a pension may be financed. Funded status In an unfunded defined benefit pension, no assets are set aside and the benefits are paid for by the employer or other pension sponsor as and when they are paid. Pension arrangements provided by the state in most countries in the world are unfunded, with benefits paid directly from current workers' contributions and taxes. This method of financing is known as Pay-as-you-go. It has been suggested that this model bears a disturbing resemblance to a Ponzi scheme. In a funded defined benefit arrangement, an actuary calculates the contributions that the plan sponsor must make to ensure that the pension fund will meet future payment obligations. This means that in a defined benefit pension, investment risk and investment rewards are typically assumed by the sponsor/employer and not by the individual. If a plan is not well-funded, the plan sponsor may not have the financial resources to continue funding the plan. In the United States, private employers must pay an insurance-type premium to the Pension Benefit Guaranty Corporation, a government agency whose role is to encourage the continuation and maintenance of voluntary private pension plans, provide timely and uninterrupted payment of pension benefits. Defined contribution pensions, by definition, are funded, as the "guarantee" made to employees is that specified (defined) contributions will be made during an individual's

working life.

Local or universal plans Because any dollar of savings by any one person in the economy means a dollar of borrowing by another person (all financial assets in the economy net to zero at all times, but real assets do not), any universal system of pensions cannot save in the conventional way. Therefore, if the United States were a true autarkic economy, then any universal pension system must be pay as you go because the food, clothes and services that someone aged 25 year today would need in 40 years would be when he is age 65 would be produced 40 years later. Storing money or financial assets today represents current claims on curent production. But a system of prefunding would enable the accounting of such a system to work, given that real savings in the form of capital inmvestments would have made the economy more productive in the future. However, once we release the assumption of universality by say allowing for foreign investments -- the average age in Mexico is under 16 -- we can perform some pre-funding. The extent of possible pre-funding could be gaged by the current account or trade deficit or surplus.

Current challenges A growing challenge for many nations is population ageing. As birth rates drop and life expectancy increases an ever-larger portion of the population is elderly. This leaves fewer workers for each retired person. In almost all developed countries this means that government and public sector pensions could collapse their economies unless pension systems are reformed or taxes are increased. One method of reforming the pension system is to increase the retirement age. Two exceptions are Australia an d Canada, where the pension system is forecast to be solvent for the foreseeable future. In Canada, for instance, the annual payments were increased by some 70% in 1998 to achieve this. These two nations also have an advantage from their relative openness to immigration. However, their populations are not growing as fast as the U.S., which supplements a high immigration rate with one of the highest birthrates among Western countries. Thus, the population in the U.S. is not aging to the extent as those in Europe, Australia, or Canada. Another growing challenge is the recent trend of businesses, like an airline company or computer firm, purposely underfunding one their pension funds in order to push the costs onto the federal government. Bradley Belt, executive director of the PBGC (the Pension Benefit Guaranty Corporation, the federal agency that insures private-sector definedbenefit pension plans in the event of bankruptcy), testified before a congressional hearing in October 2004, I am particularly concerned with the temptation, and indeed, growing tendency, to use the pension insurance fund as a means to obtain an interest-free and risk-free loan to enable companies to restructure. Unfortunately, the current calculation appears to be that shifting pension liabilities onto other premium payers or potentially taxpayers is the path of least resistance rather than a last resort.

REFERENCES and LINKS: Agencies Pension Benefit Guaranty Corporation (PBGC) Nonprofit Groups Pension Rights Center Research on Pensions Pensions and Capital Stewardship Project at the Labor and Worklife Program, Harvard Law School Know Your Pension Articles Public Sector Pensions in the United States (EH.Net Encyclopedia of Economic History) Who owns Exxon? We do. Pension News

Updated Pepsi, Coke acquisitions bubble up pension plans

By Barry B. Burr February 26, 2010, 4:09 PM ET
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Updated on March 1 Acquisitions by Coca-Cola Co. and PepsiCo Inc. will impact a combined $21.5 billion in estimated retirement assets and combined, the companies plan to make $1.1 billion in pension contributions this year. Coca-Colas $12.2 billion acquisition of Coca-Cola Enterprises Inc.s North American business will affect $6 billion in defined benefit assets and an estimated $2.9 billion in defined contribution assets. It includes the assumption of Coca-Cola Enterprises $580 million in accumulated benefits obligations for North America, according to a Feb. 25 joint statement from both Atlanta-based companies that announced the deal. Coca-Cola Enterprises had a total accumulated benefit obligation of $3.4 billion, according to its 10-K report filed Feb. 26. A breakout of the assets related to pension liabilities wasnt available.

The companies expect the deal to close between October and December. Coca-Cola currently owns 34% of Coca-Cola Enterprises, which Coca-Cola will exchange as part of its purchase. Coca-Colas U.S. defined benefit plans have a total of $1.97 billion in assets and its non-U.S. plans $1.05 billion, both as of Dec. 31. Coca-Cola Enterprises had $2.96 billion in defined benefit assets, as of Dec. 31, according to its 10-K filed Feb. 12. In defined contribution assets, Coca-Cola has $1.57 billion and Coca-Cola Enterprises $1.33 billion, according to Pensions & Investments estimates. Coca-Colas U.S. plan had at least 39% in domestic equity, 7.8% in international equity, 20% in fixed income, 4.1% in hedge funds and limited partnerships, 5.4% in real estate, 8.5% cash, and the rest in other investments, according to its 10-K filed Feb. 26. The other includes 13% in funds that include equity and fixed income that the company didnt break out. Coca-Cola Enterprises had 38.4% in international equity, 18.7% in U.S. equity, 24% in fixed income, 5% in private equity, 4.3% in hedge funds, 4.4% in real estate, 1% in infrastructure, 0.7% in timber and the rest in other assets. The two plans have few overlapping defined benefit managers, according to the 2009 Money Market Directory. Of the managers they share, they both use J.P. Morgan Asset Management for fixed income and real estate. Coca-Cola also uses J.P. Morgan for international and emerging markets equities. Coca-Cola uses New Star International Managers Ltd for international bonds, while Coca-Coal Enterprises uses New Star for international equities. Meanwhile, PepsiCos $3.9 billion acquisition of Pepsi Bottling Group Inc. and PepsiAmericas Inc. will impact $8.64 billion in defined benefit assets and an estimated $4 billion in defined contribution assets. Pepsi on Feb. 26 completed its acquisition of the 50% each of Pepsi Bottling and PepsiAmericas it does not already own, PepsiCo announced in a statement Feb. 26. Purchase, N.Y.-based PepsiCo had $5.42 billion in U.S. defined benefit assets and $1.56 billion in international defined benefit assets, as of Dec. 26, according to its 10-K, filed Feb. 22. It had $3.2 billion in defined contribution assets, according to a P&I estimate.

Somers, N.Y.-based Pepsi Bottling had $1.49 billion in defined benefit assets, as of Dec. 26, according to its 10-K filed Feb. 22. It has $807 million in defined contribution assets, according to a P&I estimate. Minneapolis-based PepsiAmericas had $171 million in defined benefit assets as of Jan. 2, according to its 10-K, filed Feb. 22. A recent amount of PepsiAmericas defined benefits assets werent available. A comparison of the investment managers was unavailable. PepsiCos U.S. defined benefit fund has no alternative investments. As of Dec. 26, 29.8% of fund assets were in U.S. equity, 15% in international equity, 6.1% PepsiCo stock, 39.8% in fixed income, and the rest in cash and contracts with insurance companies. Pepsi Bottling defined benefit assets were 34.8% in U.S. equities, 30.1% in international equities, 30.4% in fixed income, and the rest in cash and group annuity contracts. PepsiAmericas defined benefit fund had 53% in U.S. equities, 15% in non-U.S. equities, 26% in fixed income and the rest in cash, according to its 10-K. In terms of defined benefit contributions planned for 2010: PepsiCo plans to contribute about $700 million, according to its 10-K. It didnt break out amounts for its U.S. and non-U.S. plans. In 2009, PepsiCo contributed $1.04 billion to its U.S. plans and $167 billion to its non-U.S. plans. Pepsi Bottling plans to contribute $132 million, according to its 10-K. Last year, it contributed $229 million. A forecast for 2010 contributions wasnt available. PepsiAmericas gave no contribution projection for 2010 in its 10-K. Coca-Cola plans to contribute $73 million, primarily to its non-U.S. plans, according to its 10-K, which wasnt more specific. In 2009, it contributed $269 million, of which $175 million was for its U.S. plans. Coca-Cola Enterprises plans to contribute $150 million to its U.S. plans and $50 million to its non-U.S. plans, according to its 10-K. In 2009, it contributed $322 million to its U.S. plans .
Contact Barry B. Burr at bburr@pionline.com

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