Coca Cola and Pepsi: a Comparative Study of Pension Plans, Investment and Employment Preference

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Running Head: COCA COLA AND PEPSI A COMPERATIVE STUDY

Coca cola and Pepsi: A comparative study of
Pension plans, investment and
Employment preference
April Oaks-Brunson
Ms. Brenda Adams
Intermediate Accounting III
February, 18,2011

COCA COLA AND PEPSI A COMPERATIVE STUDY

Coca cola and Pepsi: A comparative study of
Pension plans, investment and
Employment preference

Pension and Postretirement Benefit Plans
 
The Coca cola has a non-contributory pension plan covering substantially all non- union employees and one non-contributory pension plan covering certain union employees. Costs of the plans are charged to current operations and consist of several components of net periodic pension cost based on various actuarial assumptions regarding future experience of the plans. In addition, certain other union employees are covered by plans provided by their respective union organizations and the Company expenses amounts as paid in accordance with union agreements. The Company recognizes the cost of postretirement benefits, which consist principally of medical benefits, during employees’ periods of active service. The Coca-Cola Co. is adopting a cash-balance pension plan for new and current employees. Under the cash-balance plan design, employees will receive annual age-heighted credits equal to a percentage of pay. Those credits will start at 3 percent of pay and increase with age. Employees’ cash-balance plan accounts also will be credited with interest. Coca-Cola’s 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. Coca-Cola, which last year reported $31.9 billion in operating revenue—up from $28.9 billion in 2007—is the third major employer to adopt a cash-balance plan since 2006, when Congress passed the Pension Protection Act.

On the other hand a pension from PepsiCo is an important benefit that can help employees make the most of their retirement years. Add Social Security, any benefits payable from other PepsiCo plans as well as personal savings, and employees have the formula for a sound financial future. To be eligible to participate in a PepsiCo pension plan, one must be either a full-time employee or a part-time employee working at least 1,000 hours in a year at PepsiCo or a subsidiary of PepsiCo that sponsors the plan.

The best part about Pepsi’s pension benefit is that it is provided to employees at no cost. Employees do not have to contribute any of their current compensation to receive a pension. There are no payroll deductions from their pay check and there are no out-of-pocket costs to pay. PepsiCo contributes amounts on employee’s behalf to the Plan for their exclusive benefit in accordance with Federal tax law.

Measurement of Pension Costs and Obligations
The determination of pension costs and obligations is based on the attribution of pension benefits to periods of employee service and the use of actuarial assumptions to calculate the present value of such benefits. Actuarial assumptions reflect the time value of money and the probability of payment. The following three key economic assumptions determine pension costs: • The discount rate

• The salary scale
• The expected long-term rate of return on plan assets Pepsi’s Annual pension and retiree medical expense amounts are principally based on following 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 their funded plans. Significant assumptions used to measure Pepsi’s annual pension and retiree medical expense include: • interest rate used to determine the present...
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