Annual report pursuant to Section 13 and 15(d)

PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS

v2.4.0.6
PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
 12 Months Ended
Dec. 31, 2011
Pension and Other Postretirement Benefit Plans [Abstract]  
PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
Our Company sponsors and/or contributes to pension and postretirement health care and life insurance benefit plans covering substantially all U.S. employees. We also sponsor nonqualified, unfunded defined benefit pension plans for certain associates. In addition, our Company and its subsidiaries have various pension plans and other forms of postretirement arrangements outside the United States.
As part of the Company's acquisition of CCE's North American business, we assumed certain liabilities related to pension and other postretirement benefit plans. Refer to Note 2 for additional information related to this acquisition. These liabilities relate to various pension, retiree medical and defined contribution plans (referred to herein as the "assumed plans"). The assumed plans include participation in multi-employer pension plans in the U.S. See discussion of multi-employer plans below.
We refer to the funded defined benefit pension plans in the U.S. that are not associated with collective bargaining organizations as the "primary U.S. plans." The primary U.S. plans include both the Company's existing pension plan as well as one of the pension plans assumed in connection with our acquisition of CCE's North American business. As of December 31, 2011, the primary U.S. plans represented 58 percent and 60 percent of the Company's consolidated projected pension benefit obligation and pension assets, respectively.
Obligations and Funded Status
The following table sets forth the changes in benefit obligations and the fair value of plan assets for our benefit plans (in millions):
 
Pension Benefits  
 
Other Benefits  
 
2011

 
2010

 
2011

 
2010

Benefit obligation at beginning of year1
$
7,292

 
$
3,996

 
$
889

 
$
483

Service cost
249

 
143

 
32

 
24

Interest cost
391

 
260

 
45

 
30

Foreign currency exchange rate changes
30

 
(80
)
 
2

 
—

Amendments
(57
)
 
(6
)
 
(12
)
 
—

Actuarial loss (gain)
773

 
109

 
45

 
1

Benefits paid2
(440
)
 
(249
)
 
(63
)
 
(37
)
Business combinations3
—

 
3,163

 
—

 
381

Divestitures4
—

 
(24
)
 
—

 
—

Settlements
(24
)
 
(22
)
 
—

 
—

Curtailments
—

 
—

 
—

 
—

Special termination benefits
8

 
—

 
3

 
1

Other
33

 
2

 
12

 
6

Benefit obligation at end of year1
$
8,255

 
$
7,292

 
$
953

 
$
889

Fair value of plan assets at beginning of year
$
5,497

 
$
3,032

 
$
187

 
$
173

Actual return on plan assets
73

 
445

 
(4
)
 
16

Employer contributions
1,001

 
77

 
—

 
—

Foreign currency exchange rate changes
(1
)
 
(59
)
 
—

 
—

Benefits paid
(374
)
 
(193
)
 
(1
)
 
(6
)
Business combinations3
—

 
2,231

 
—

 
—

Divestitures4
—

 
(18
)
 
—

 
—

Settlements
(27
)
 
(20
)
 
—

 
—

Other
2

 
2

 
3

 
4

Fair value of plan assets at end of year
$
6,171

 
$
5,497

 
$
185

 
$
187

Net liability recognized
$
(2,084
)
 
$
(1,795
)
 
$
(768
)
 
$
(702
)
1 
For pension benefit plans, the benefit obligation is the projected benefit obligation. For other benefit plans, the benefit obligation is the accumulated postretirement benefit obligation. The accumulated benefit obligation for our pension plans was $7,958 million and $6,949 million as of December 31, 2011 and 2010, respectively.
2 
Benefits paid to pension plan participants during 2011 and 2010 included $66 million and $56 million, respectively, in payments related to unfunded pension plans that were paid from Company assets. Benefits paid to participants of other benefit plans during 2011 and 2010 included $62 million and $31 million, respectively, that were paid from Company assets.
3 
Related to the acquisition of CCE's North American business during the fourth quarter of 2010. Refer to Note 2.
4 
Primarily related to the sale of our Norwegian bottling operation to New CCE during the fourth quarter of 2010. Refer to Note 2.
Pension and other benefit amounts recognized in our consolidated balance sheets are as follows (in millions):
 
Pension Benefits  
 
Other Benefits  
December 31,
2011

 
2010

 
2011

 
2010

Noncurrent asset
$
468

 
$
66

 
$
—

 
$
—

Current liability
(68
)
 
(55
)
 
(21
)
 
(21
)
Long-term liability
(2,484
)
 
(1,806
)
 
(747
)
 
(681
)
Net liability recognized
$
(2,084
)
 
$
(1,795
)
 
$
(768
)
 
$
(702
)

Effective January 1, 2010, the Company's existing primary U.S. pension plan was transitioned from a traditional final average pay formula to a cash balance formula. In general, employees may receive credits based on age, service, pay and interest under the new method. The primary pension plan acquired by the Company in connection with our acquisition of CCE's North American business transitioned to a cash balance formula in 2011.
Certain of our pension plans have projected benefit obligations in excess of the fair value of plan assets. For these plans, the projected benefit obligations and the fair value of plan assets were as follows (in millions):
December 31,
2011

 
2010

Projected benefit obligation
$
7,591

 
$
7,024

Fair value of plan assets
5,048

 
5,172


Certain of our pension plans have accumulated benefit obligations in excess of the fair value of plan assets. For these plans, the accumulated benefit obligations and the fair value of plan assets were as follows (in millions):
December 31,
2011

 
2010

Accumulated benefit obligation
$
7,277

 
$
6,503

Fair value of plan assets
4,998

 
4,981


Pension Plan Assets
The following table presents total assets for our U.S. and non-U.S. pension plans (in millions):
 
U.S. Plans  
 
Non-U.S. Plans  
December 31,
2011

 
2010

 
2011

 
2010

Cash and cash equivalents
$
104

 
$
88

 
$
123

 
$
38

Equity securities:
 
 
 
 
 
 
 
U.S.-based companies
1,362

 
1,324

 
33

 
30

International-based companies
630

 
631

 
323

 
107

Fixed-income securities:
 
 
 
 
 
 
 
Government bonds
358

 
268

 
415

 
163

Corporate bonds and debt securities
669

 
625

 
49

 
20

Mutual, pooled and commingled funds1
323

 
431

 
406

 
700

Hedge funds/limited partnerships
458

 
415

 
31

 
23

Real estate
256

 
230

 
14

 
12

Other
114

 
106

 
503

 
286

Total pension plan assets2
$
4,274

 
$
4,118

 
$
1,897

 
$
1,379

1 
Mutual, pooled and commingled funds include investments in equity securities, fixed-income securities and combinations of both. There are a significant number of mutual and pooled funds from which investors can choose. The selection of the type of fund is dictated by the specific investment objectives and needs of a given plan. These objectives and needs vary greatly between plans.
2 
Fair value disclosures related to our pension assets are included in Note 16. Fair value disclosures include, but are not limited to, the levels within the fair value hierarchy on which the fair value measurements in their entirety fall, a reconciliation of the beginning and ending balances of Level 3 assets and information about the valuation techniques and inputs used to measure the fair value of our pension and other postretirement assets.
Investment Strategy for U.S. Pension Plans
In 2010, our U.S. pension plan assets increased significantly as a result of our acquisition of CCE's North American business. The Company has since aligned the investment strategy of the combined assets to provide an allocation that supports the Company's investment goals for pension assets. Our investment strategies are described below.
The Company utilizes the services of investment managers to actively manage the pension assets of our primary U.S. plans. We have established asset allocation targets and investment guidelines with each investment manager. Our asset allocation targets promote optimal expected return and volatility characteristics given the long-term time horizon for fulfilling the obligations of the plan. Selection of the targeted asset allocation for U.S. plan assets was based upon a review of the expected return and risk characteristics of each asset class, as well as the correlation of returns among asset classes. Our target allocation is a mix of approximately 51 percent equity investments, 31 percent fixed-income investments and 18 percent in alternative investments. Furthermore, we believe our target allocation will enable us to achieve the following long-term investment objectives:
(1)
optimize the long-term return on plan assets at an acceptable level of risk;
(2)
maintain a broad diversification across asset classes and among investment managers;
(3)
maintain careful control of the risk level within each asset class; and
(4)
focus on a long-term return objective.
The guidelines that have been established with each investment manager provide parameters within which the investment managers agree to operate, including criteria that determine eligible and ineligible securities, diversification requirements and credit quality standards, where applicable. Unless exceptions have been approved, investment managers are prohibited from buying or selling commodities, futures or option contracts, as well as from short selling of securities. Additionally, investment managers agree to obtain written approval for deviations from stated investment style or guidelines. As of December 31, 2011, no investment manager was responsible for more than 10 percent of total U.S. plan assets.
Our target allocation of 51 percent equity investments is composed of approximately 39 percent domestic large-cap securities, 33 percent international securities and 28 percent domestic small-cap securities. Optimal returns through our investments in domestic large-cap securities are achieved through security selection and sector diversification. Investments in common stock of our Company accounted for approximately 12 percent of our investments in domestic large-cap securities and approximately 3 percent of total U.S. plan assets. Our investments in international securities are intended to provide equity-like returns, while at the same time helping to diversify our overall equity investment portfolio. Our investments in domestic small-cap securities are expected to experience larger swings in their market value on a periodic basis. Our investments in this asset class are selected based on capital appreciation potential.
Our target allocation of 31 percent fixed-income investments is composed of 71 percent long-duration bonds and 29 percent high-yield bonds. Long-duration bonds provide a stable rate of return through investments in high-quality publicly traded debt securities. Our investments in long-duration bonds are diversified in order to mitigate duration and credit exposure. High-yield bonds are investments in lower-rated and non-rated debt securities, which generally produce higher returns compared to long-duration bonds. Investments in high-yield bonds also help diversify our fixed-income portfolio.
In addition to investments in equity securities and fixed-income investments, we have a target allocation of 18 percent in alternative investments. These alternative investments include hedge funds, private equity limited partnerships, leveraged buyout funds, international venture capital partnerships and real estate. The objective of investing in alternative investments is to provide a higher rate of return than that available from publicly traded equity securities. These investments are inherently illiquid and require a long-term perspective in evaluating investment performance.
Investment Strategy for Non-U.S. Pension Plans
As of December 31, 2011, the long-term target allocation for 42 percent of our international subsidiaries' plan assets, primarily certain of our European plans, is 60 percent equity securities and 40 percent fixed-income securities. The allocation for the remaining 58 percent of the Company's international subsidiaries' plan assets consisted of 36 percent mutual, pooled and commingled funds; 18 percent fixed-income securities; 14 percent equity securities; and 32 percent in other investments. The investment strategies of our international subsidiaries differ greatly, and in some instances are influenced by local law. None of our pension plans outside the United States is individually significant for separate disclosure.
Other Postretirement Benefit Plan Assets
Plan assets associated with other benefits primarily represent funding of the U.S. postretirement benefit plan through a U.S. Voluntary Employee Beneficiary Association ("VEBA"), a tax-qualified trust. The VEBA assets remain segregated from the primary U.S. pension master trust and are primarily invested in liquid assets due to the level of expected future benefit payments.
The following table presents total assets for our other postretirement benefit plans (in millions):
December 31,
2011

 
2010

Cash and cash equivalents
$
86

 
$
84

Equity securities:
 
 
 
U.S.-based companies
70

 
75

International-based companies
13

 
14

Fixed-income securities:
 
 
 
Government bonds
2

 
1

Corporate bonds and debt securities
6

 
6

Mutual, pooled and commingled funds
3

 
3

Hedge funds/limited partnerships
2

 
1

Real estate
2

 
2

Other
1

 
1

Total other postretirement benefit plan assets1
$
185

 
$
187

1 
Fair value disclosures related to our other postretirement benefit plan assets are included in Note 16. Fair value disclosures include, but are not limited to, the levels within the fair value hierarchy on which the fair value measurements in their entirety fall, a reconciliation of the beginning and ending balances of Level 3 assets and information about the valuation techniques and inputs used to measure the fair value of our pension and other postretirement assets.
Components of Net Periodic Benefit Cost
Net periodic benefit cost for our pension and other postretirement benefit plans consisted of the following (in millions):
 
Pension Benefits  
 
Other Benefits  
Year Ended December 31,
2011

 
2010

 
2009

 
2011

 
2010

 
2009

Service cost
$
249

 
$
143

 
$
113

 
$
32

 
$
24

 
$
21

Interest cost
391

 
260

 
213

 
45

 
30

 
29

Expected return on plan assets
(494
)
 
(295
)
 
(214
)
 
(8
)
 
(8
)
 
(8
)
Amortization of prior service cost (credit)
5

 
5

 
5

 
(61
)
 
(61
)
 
(61
)
Amortization of actuarial loss
87

 
57

 
86

 
2

 
3

 
—

Net periodic benefit cost (credit)
$
238

 
$
170

 
$
203

 
$
10

 
$
(12
)
 
$
(19
)
Settlement charge
3

 
6

 
5

 
—

 
—

 
—

Curtailment charge
—

 
—

 
1

 
—

 
—

 
—

Special termination benefits1
8

 
—

 
9

 
3

 
1

 
4

Total cost (credit) recognized in the statements of income
$
249

 
$
176

 
$
218

 
$
13

 
$
(11
)
 
$
(15
)
1 
The special termination benefits primarily relate to the Company's productivity, restructuring and integration initiatives. Refer to Note 18 for additional information related to our productivity, restructuring and integration initiatives.
The following table sets forth the changes in AOCI for our benefit plans (in millions, pretax):
 
Pension Benefits  
 
Other Benefits  
December 31,
2011

 
2010

 
2011

 
2010

Beginning balance in AOCI
$
(1,006
)
 
$
(1,119
)
 
$
72

 
$
118

Recognized prior service cost (credit)
5

 
5

 
(61
)
 
(61
)
Recognized net actuarial loss (gain)
90

 
63

 
2

 
3

Prior service credit (cost) arising in current year
57

 
6

 
12

 
—

Net actuarial (loss) gain arising in current year
(1,194
)
 
41

 
(57
)
 
8

Impact of divestitures1
—

 
(8
)
 
—

 
—

Translation gain (loss)
(7
)
 
6

 
(2
)
 
4

Ending balance in AOCI
$
(2,055
)
 
$
(1,006
)
 
$
(34
)
 
$
72

1 
Primarily related to the sale of our Norwegian bottling operation to New CCE. Refer to Note 2.
The following table sets forth amounts in AOCI for our benefit plans (in millions, pretax):
 
Pension Benefits  
 
Other Benefits  
December 31,
2011

 
2010

 
2011

 
2010

Prior service credit (cost)
$
14

 
$
(49
)
 
$
73

 
$
122

Net actuarial loss
(2,069
)
 
(957
)
 
(107
)
 
(50
)
Ending balance in AOCI
$
(2,055
)
 
$
(1,006
)
 
$
(34
)
 
$
72


Amounts in AOCI expected to be recognized as components of net periodic pension cost in 2012 are as follows (in millions, pretax):
 
Pension Benefits
 
Other Benefits
Amortization of prior service cost (credit)
$
(2
)
 
$
(52
)
Amortization of actuarial loss
137

 
7

 
$
135

 
$
(45
)

Assumptions
Certain weighted-average assumptions used in computing the benefit obligations are as follows:
 
Pension Benefits  
 
Other Benefits  
December 31,
2011

 
2010

 
2011

 
2010

Discount rate
4.75
%
 
5.50
%
 
4.75
%
 
5.25
%
Rate of increase in compensation levels
3.25
%
 
4.00
%
 
N/A

 
N/A

Certain weighted-average assumptions used in computing net periodic benefit cost are as follows:
 
Pension Benefits  
 
Other Benefits  
December 31,
2011

 
2010

 
2009

 
2011

 
2010

 
2009

Discount rate
5.50
%
 
5.75
%
 
6.00
%
 
5.25
%
 
5.50
%
 
6.25
%
Rate of increase in compensation levels
4.00
%
 
3.75
%
 
3.75
%
 
N/A

 
N/A

 
N/A

Expected long-term rate of return on plan assets
8.25
%
 
8.00
%
 
8.00
%
 
4.75
%
 
4.75
%
 
4.75
%

The expected long-term rate of return assumption for U.S. pension plan assets is based upon the target asset allocation and is determined using forward-looking assumptions in the context of historical returns and volatilities for each asset class, as well as correlations among asset classes. We evaluate the rate of return assumption on an annual basis. The expected long-term rate of return assumption used in computing 2011 net periodic pension cost for the U.S. plans was 8.5 percent. As of December 31, 2011, the 10-year annualized return on plan assets in the primary U.S. plan was 6.0 percent, the 15-year annualized return was 6.4 percent, and the annualized return since inception was 10.9 percent.
The assumed health care cost trend rates are as follows:
December 31,
2011

 
2010

Health care cost trend rate assumed for next year
8.00
%
 
8.50
%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)
5.00
%
 
5.00
%
Year that the rate reaches the ultimate trend rate
2018

 
2018


The Company's U.S. postretirement benefit plans are primarily defined dollar benefit plans that limit the effects of medical inflation because the plans have established dollar limits for determining our contributions. As a result, the effect of a 1 percentage point change in the assumed health care cost trend rate would not be significant to the Company.
The discount rate assumptions used to account for pension and other postretirement benefit plans reflect the rates at which the benefit obligations could be effectively settled. Rates for each of our U.S. plans at December 31, 2011, were determined using a cash flow matching technique whereby the rates of a yield curve, developed from high-quality debt securities, were applied to the benefit obligations to determine the appropriate discount rate. For our non-U.S. plans, we base the discount rate on comparable indices within each of the countries. The rate of compensation increase assumption is determined by the Company based upon annual reviews. We review external data and our own historical trends for health care costs to determine the health care cost trend rate assumptions.
Cash Flows
Our estimated future benefit payments for funded and unfunded plans are as follows (in millions):
Year Ended December 31,
2012

 
2013

 
2014

 
2015

 
2016

 
2017–2021

Pension benefit payments
$
486

 
$
501

 
$
521

 
$
537

 
$
553

 
$
3,042

Other benefit payments1
53

 
56

 
59

 
62

 
65

 
342

Total estimated benefit payments
$
539

 
$
557

 
$
580

 
$
599

 
$
618

 
$
3,384

1 
The expected benefit payments for our other postretirement benefit plans are net of estimated federal subsidies expected to be received under the Medicare Prescription Drug, Improvement and Modernization Act of 2003. Federal subsidies are estimated to be approximately $17 million for the period 2012–2016, and $21 million for the period 2017–2021.
On March 23, 2010, the Patient Protection and Affordable Care Act (HR 3590) (the "Act") was signed into law. As a result of this legislation, entities are no longer eligible to receive a tax deduction for the portion of prescription drug expenses reimbursed under the Medicare Part D subsidy. This change resulted in a reduction of our deferred tax assets and a corresponding charge to income tax expense of $14 million during the first quarter of 2010.
The Company anticipates making contributions in 2012 of approximately $953 million, most of which will be allocated to our primary U.S. pension plans. The majority of these contributions are discretionary.
Defined Contribution Plans
Our Company sponsors qualified defined contribution plans covering substantially all U.S. employees. Under the primary U.S. defined contribution plans, we match participants' contributions up to a maximum of 3.0 percent to 3.5 percent of compensation, subject to certain limitations. Company costs related to the U.S. plans were $78 million, $44 million and $27 million in 2011, 2010 and 2009, respectively. We also sponsor defined contribution plans in certain locations outside the United States. Company costs associated with those plans were $31 million, $35 million and $36 million in 2011, 2010 and 2009, respectively.
Multi-Employer Plans
As a result of our acquisition of CCE's North American business during the fourth quarter of 2010, the Company now participates in various multi-employer pension plans in the United States. Multi-employer pension plans are designed to cover employees from multiple employers and are typically established under collective bargaining agreements. These plans allow multiple employers to pool their pension resources and realize efficiencies associated with the daily administration of the plan.
Multi-employer plans are generally governed by a board of trustees composed of management and labor representatives and are funded through employer contributions.
The Company's expense for U.S. multi-employer pension plans totaled $69 million in 2011, of which $32 million was related to our withdrawal from certain of these plans. The charges of $32 million were included in the costs related to the Company's integration initiatives in North America. Refer to Note 18 for additional information related to these initiatives. The Company's expense for U.S. multi-employer pension plans was $9 million in 2010. The plans we currently participate in have contractual arrangements that extend into 2017. If, in the future, we choose to withdraw from any of the multi-employer pension plans in which we participate, we would need to record the appropriate withdrawal liabilities at that time.